Why S&P Global Ratings sees ESG as critical to COVID-era credit quality

More than 370 credit rating actions taken by S&P Global Ratings since March have been driven by environmental, social and governance factors as a result of the COVID-19 pandemic, S&P Global Ratings' Americas Team Leader for Sustainable Finance Michael Ferguson said in an exclusive interview for the latest episode of "ESG Insider," an S&P Global podcast.

Companies in nearly every sector have been hard hit by the economic impacts of the pandemic and many have seen their credit rating downgraded as a result. The majority of ESG-related actions S&P Global Ratings took in recent months were tied to social factors, such as how businesses are being impacted by social distancing and workforce challenges, Ferguson said.

"Managing ESG risk is critical ... because it is a central piece of understanding credit quality," he explained.

Many ESG risks such as climate change play out over the long term, giving companies time to plan and adapt. But the pandemic is forcing companies to pivot and act quickly in relation to things like supply chain management, Ferguson explained.

Some ESG-related deterioration in credit quality resulting from COVID-19 is inevitable given the pandemic circumstances.

"Certainly the idea that people are going to social distance means that they're not going to go to casinos, they're not going to go to restaurants, they're not going to get on planes for a little while. That's going to impair credit quality," Ferguson said.

But management teams do have control over their response to the virus, such as mitigating risks related to workforce and safety — and that is something ratings analysts will be watching closely as companies emerge from the crisis.

"Companies that are not particularly cautious about how they reopen and do so hastily and without taking the proper precautions," face significantly heightened social risks, Ferguson cautioned.

Listen to the episode to hear the full interview, and subscribe to ESG Insider to catch future episodes!

(Photo: AP)