Could ESG eventually guide sovereign financing decisions?

In the corporate world, financing decisions are becoming increasingly linked to performance in the environmental, social and governance (ESG) sphere of the company seeking funds.

And on the sovereign financing front, ESG considerations could potentially grow in relevance, ratings agency Moody’s VP and senior credit officer, Gabriel Torres, told BNamericas. 

The multilateral development bank segment, for example, is already taking steps along the ESG avenue by sharpening the focus on initiatives that have a positive environmental or social impact.

Torres said that “it wouldn’t surprise me if, in X number of years down the road, the market starts saying ‘well, if you are a country and you are really bad on social issues or how you treat the environment, or something else, we will penalize you on what we’re willing to fund.’

“I don’t think that’s the case today. I would hesitate to say that’s how the market acts today, and I am not predicting it will, but I think there is a slow change in perceptions.” 

This year Moody’s published new ESG credit impact and issuer profile scores for global sovereigns – which will be updated – and in June it published an associated report that drills down into Latin American data. 

Torres said: “What we’re doing here is responding to market demand. I think this is an evolving market demand and the market – and, by this, I mean all the participants – doesn’t really fully yet know exactly how they want to use this.”

A key takeaway from the report, authored by Torres, is that the overall credit impact of ESG factors in Latin America is lower than in other emerging market regions, supported by lower exposures to environmental risks and higher average income levels. 

Nevertheless, the report states, there are wide variations in scores in the region “reflecting both different levels of ESG exposure and varying capacities to deal with ESG-related risks.”

Environmental risk is highest in the Caribbean, while social and governance risk is highest in Central America.

On the environment front, Latin American nations heavily dependent on oil exports, like Ecuador and Trinidad & Tobago, are exposed to carbon transition risk. A potential Latin American hydrocarbons-exporting powerhouse, Argentina has limited exposure today, but this could grow if the country develops its Vaca Muerta shale formation and builds a major gas-exporting industry. 

As the world starts the process of weaning itself off hydrocarbons and with the potential for future ESG-related financing hurdles, Argentine producers say the country has a limited time window to develop Vaca Muerta and build production capacity to become a regional, and eventually a global, exporter of gas to replace dirtier fuels and provide baseload power.  

Amid sustained pandemic-related expenditure pressures, Latin American sovereign external issuance remained at high levels in 1H21, registering at US$37.5bn, in line with that issued in the same period of 2020, according to fellow rating agency Fitch. 

A full set of ESG credit impact scores and issuer profile scores is available at Moodys.com