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Moody’s flags ESG concerns in emerging market debt

Emerging market debtRating agency Moody’s has warned of the heightened ESG risk among issuers of debt in emerging markets (EMs).

More than a third of its rating actions (36%) on emerging market debt issuers were connected to ESG failings, according to a recently published report and primary among these failings were governance considerations.

In addition, ESG considerations are more prevalent in rating actions for public-sector debt issuers in EMs than for their peers in developed markets, reflecting generally weaker fiscal, financial and institutional characteristics, states the report.

The difference is especially clear when comparing factors such as challenges to sustainable development and vulnerability and readiness for physical environmental risk.

While ESG risks are often higher in EMs as opposed to developed markets, the problem is exacerbated by the fact that issuers’ capacity to respond to these risks is often also weaker, according to Nishad Majmudar, Moody’s assistant vice president and analyst.

The coronavirus pandemic, which Moody's considers a social risk, has also brought to the fore the materiality of key social and governance issues globally and has been factored into many rating actions in 2020. It is also likely to fuel further focus on ESG risks in 2021 and beyond.

"We expect ESG considerations to become even more material to debt issuers' credit quality globally – and particular in EMs – given the range and rise of ESG risks such as climate change and public health," added Majmudar.

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