Inside ESG: Moody’s Expands ESG Integration of Credit Scores to Financial Institutions

Risk assessment firm Moody’s is expanding its environmental, social and governance (ESG) credit scores to financial institutions and consumer products. Between the expansion of credit scores as well as recent decisions by the SEC, companies will begin to look for solutions to address increased reporting requirements.

What’s happening

Over the past year, Moody’s has expanded its introduction of ESG considerations into their issuer profile scores (IPS) and credit impact scores (CIS). For example, on March 22, Moody’s introduced the expanded consideration to the airline industry, which they found to be a significant risk during the energy transition.

As ESG Today reports, Moody’s is now integrating ESG for financial institutions. This new standard will measure the emissions impact of financial institutions and affect how they have access to credit. According to ESG Today:

“Moody’s initially launched IPS and CIS scores in January 2021, initially focusing on sovereign issuers, and has expanded its coverage over the past year, adding sectors ranging from healthcare, airlines, utilities, media and automakers to states, cities and counties. More sector introductions are expected throughout 2022.”

Brian Cahill, Managing Director of ESG at Moody’s Investors Service, tells ESG Today:

“Market participants are increasingly focusing on ESG issues and their potential to affect credit risk and investment decisions. Our ESG Issuer Profile Scores and Credit Impact Scores provide a transparent, consistent and quantified assessment of how ESG impacts our credit analysis.”

Why it matters

By quantifying the tangible risks of ESG factors, Moody’s has increased the transparency around the impacts of climate change on businesses across the world. This move by Moody’s emphasizes the need for organizations to be prepared for increased reporting demands in order to access capital markets.

The SEC has also moved to increase requirements for corporate reporting. The additional requirements are similar to what Moody’s has implemented. 

What we are watching

These new scores may affect rates for many companies as they access capital from investors. As new regulatory schemes are released like the new SEC requirements, reporting requirements will only become more onerous.

Companies with negatively affected scores may quickly begin investing in ESG solutions to improve their reporting structures and mitigate their climate risks. We expect to see a flurry of emissions tracking services coming into the market to take advantage of the new regulatory environment spurred by Moody’s continued expansion of ESG scores and the SEC’s decision. 

However, the most valuable solutions will be offerings that focus on specific verticals as climate accounting requirements and challenges will vary drastically across different industries.

Interested in learning more about ESG solutions? Contact us.

Trevor Cross