Dive Brief:

• One out of five organizations suffered a credit rating setback after an assessment of their adherence to environmental, social and governance (ESG) best practices, Moody’s Investors Service said. More than half of speculative-grade entities saw their credit rating decline after a review of their ESG performance. 
• Nearly 30% of the organizations scored for ESG performance “face potential future negative impact from ESG issues,” Moody’s said in a report. “For nearly a quarter of scored entities, credit ratings would be different if not for ESG issues.”
• ESG considerations influence the credit rating of about 41% of companies in a way that is either positive, highly negative or very highly negative, Moody’s said. As of Sept. 30, Moody’s assigned ESG scores for 5,700 corporations, financial institutions, sovereigns, sub-sovereigns and “public finance entities.”

Dive Insight:

CFOs in recent years have faced sharper scrutiny of their companies’ ESG performance from regulators, investors, lawmakers and shareholder activists. The Moody’s report suggests that companies that decide to disregard sustainability will probably pay a higher cost for capital.

The use of ESG criteria is growing, according to Securities and Exchange Commission (SEC) Chair Gary Gensler. For example, investors worldwide with $130 trillion in assets are seeking to assess potential losses and curb environmental damage by pressing for uniform and consistent company disclosures on climate risk, Gensler said.

The SEC is reviewing public comments on a rule proposed in March that would require publicly traded companies to provide detailed disclosures on carbon emissions and climate risk. The agency originally planned to publish the final rule in October.

The SEC aims to mandate that companies describe on Form 10-K their strategy toward climate risk, including plans to achieve any targets they have set for reducing such risk.

Companies would also need to disclose data on their greenhouse gas emissions, either from their facilities or through their energy purchases, and obtain independent attestation of their data.

Critics say the SEC rule requires disclosures that are not material to investors’ decisions and efforts to manage risk.

SEC Chair Gensler defended the proposed regulation by saying that shareholders are pressing for uniform and consistent disclosures on climate risk. By following climate risk reporting standards, businesses would gain detailed insights into potential costs and opportunities, he said.

Lower-rated firms tend to receive the lowest ESG scores, according to Moody’s, which is one of dozens of firms that provide ESG scores.

ESG criteria “have a highly negative or very highly negative credit impact on just over half of speculative-grade entities,” Moody’s said, citing largely “governance weaknesses, particularly aggressive financial policies.”

Among organizations with an investment grade, social risks most influence their credit rating, Moody’s said.