Moody's Sustainability / ESG Integration

ESG integration into credit rating

Moody’s Investors Service (MIS) systematically incorporates material ESG and climate considerations into its credit analysis and credit ratings to help market participants understand how ESG issues affect their fixed income decisions.

MIS launched ESG Issuer Profile and Credit Impact Scores to provide greater transparency into how ESG considerations are incorporated into credit ratings. While initially focused on sovereign issuers, coverage was expanded in 2021 to include more than 1,700 governments, financial institutions and corporations across a wide range of sectors.

Assessing exposure with Issuer Profile Scores (IPS)

Issuer Profile Scores (IPSs) are assessments of the exposure to environmental, social and governance risks or benefits, based on the general ESG principles that have a material impact on credit quality. Based on a five-point scale ranging from positive (E-1, S-1 or G-1) to very highly negative (E-5, S-5 or G-5), these scores provide a consistent way to express this assessment.

Measuring impact with ESG Credit Impact Scores (CIS)

Credit Impact Scores (CISs) are an output of the credit rating process that indicate the extent, if any, to which ESG factors impact the credit rating of an issuer or transaction. Similar to IPS, these scores are attributed on a five-point scale from very highly negative (5) to positive (1).

For example, the CIS score of the issuer in Figure 1 is highly negative (CIS-4), reflecting high exposure to social risks and moderately negative exposure to environment risks, combined with relatively low resilience as weakening public finances and relatively low-income levels constrain the issuer's capacity to respond to environmental and social shocks.

On the other hand, the CIS score of the issuer in Figure 2 is positive (CIS-1), reflecting low exposure to environmental risks, limited social risks and very strong governance and forward-looking policymaking.

Figure 1

Figure 2

Visualizing ESG risk with Heat Maps

In addition to ESG scores, MIS publishes Carbon Transition Assessment scores (CTAs), which provide a consistent and verifiable means to analyze carbon transition risk for 3801 rated issuers in the most exposed sectors, such as oil and gas and automobile manufacturers, among others.

For each of the sectors MIS rates globally, MIS also publishes Environmental and Social Risk Heat Maps that visualize the relative ranking of various sectors along the E and S classification of risks.

As the CTAs demonstrate, MIS is committed to creating tools that help the financial system assess transition risk and readiness for a low-carbon world.

MIS Environmental Risk Heat Map

Debt numbers as of June 2020.
Source: ESG – Global: Heat map: Sectors with $3.4 trillion in debt face heightened environmental credit risk, 14 December 2020

Assessment approach

Based on a review of 89 global sectors representing approximately $79 trillion of rated debt. In this report, MIS highlighted 13 sectors with $3.4 trillion in rated debt that face “very high” or “high” environmental credit risk.

MIS Social Risk Heat Map

Debt numbers as of May 2019.
Source: ESG – Global: Heat map: Social considerations pose high credit risk for 14 sectors, $8 trillion debt, 31 October 2019

Assessment approach

Based on MIS analysis of 82 global sectors with total rated debt of about $77.7 trillion, social considerations pose “high risk” to the credit quality of 14 sectors with $8.3 trillion in rated debt.

ESG integration for risk quantification

By integrating ESG considerations into our Moody’s Analytics (MA) risk management scoring and data products, we are providing global markets with critical financial risk information.

For example, we are integrating our ESG and Climate Scores and Assessments into Moody’s CreditView—our flagship research, data and analytics platform that features MIS credit ratings and analysis along with MA research and data.

Built on our award-winning scenario generation software, this service helps insurers meet Own Risk and Solvency Assessment (ORSA) and Task Force on Climate-Related Financial Disclosures (TCFD) requirements by quantifying the financial impact from physical and transition risk. It can also support the integration of climate risk into strategic asset allocation (SAA) and investment screening processes.

The world’s most powerful comparable data resource on private companies, Orbis has information on over 400 million global entities. We are incorporating additional ESG data sources into our existing database and standardizing it to make it richer, more powerful and easier to integrate into our customers’ workflows.

The Climate Pathway Scenario Service won the Climate Risk Initiative of the Year in the 2021 Insurance Asset Risk Awards in North America.

For the third straight year, Orbis won the Best Data Solution for Know Your Customer (KYC) category in the RegTech Insight Awards 2021 in Europe.

RMS acquisition

Today’s leaders face a complex, interlinked world of risks and stakeholders. In the context of a global pandemic, the climate crisis and increasing cyberattacks, our customers must manage a wider range of risks than ever before. We are excited to add RMS and its team of world-class data scientists, modelers and software engineers to the Moody’s family to help accelerate solutions that enable customers to build resilience and make better decisions.

Moody’s Investors Service (MIS) Offerings
and Initiatives

Moody’s Corporation (MCO) and
Corporate Social Responsibility (CSR)
Initiatives / Disclosures

Moody’s Corporation (MCO) Acquisitions

Rob Fauber
‍President & Chief Executive Officer

We continue to make strategic acquisitions and investments that build on our ESG risk monitoring and assessment capabilities. In September 2021, we acquired RMS — a leader in climate and natural disaster risk modeling and analytics. With over 400 risk models covering 120 countries, RMS provides extensive and quantitative climate and catastrophe risk modeling solutions for P&C insurers and reinsurers.