The world is in a state of flux. But what will 2022 mean for credit markets in this next phase of the COVID-19 pandemic, with debt levels at record highs, inflation concerns increasing, cybersecurity risks mounting, supply chains shifting and investors increasingly focused on ESG issues? Moodys Global Outlooks 2022 analyzes what is driving these changes, the credit risks and opportunities they present and how they inform our outlook for different regions, countries and sectors.

ESG Credit Trends

Growing awareness of the potential consequences of global warming will heighten investors’ focus on physical climate risk

Potential action to tackle environmental issues, such as building resilience against the effects of physical climate risks and protecting biodiversity, as well as addressing social issues including human rights and diversity, could have credit implications across sectors in 2022, Moody’s Investors Service said in its global ESG outlook published. The credit impact of carbon transition risk will also become increasingly evident for carbon-intensive industries.

“As awareness grows of the potential consequences of global warming – and the limitations of countries’ decarbonization commitments at COP26 – investors are likely to become more mindful of the financial impacts of physical climate risk. For example, there are material differences in sovereigns’ exposure and resilience to physical climate change caused by global warming, with some emerging markets considerably more exposed.”

said Lucia Lopez, Vice President – Senior Credit Officer at Moody’s Investors Service

The credit implications of carbon transition risk will become even more evident

The credit impacts of carbon transition risk will also become more evident in the year ahead, adds Lopez. Net zero initiatives by the financial sector, such as The Glasgow Financial Alliance for Net Zero (GFANZ), could lead to greater credit strain on carbon-intensive entities over time by potentially limiting funding available from the capital markets – especially for companies that are weakly positioned in their net-zero journey.

Investors will also focus more on natural capital and biodiversity, which are inextricably linked to climate change but have not been as closely considered by financial markets. An important milestone will be the planned finalization in May 2022 of the Convention on Biological Diversity’s global biodiversity framework, which aims to put biodiversity on a path to recovery by 2030 at the latest.

ESG Credit Trends

Initiatives to expand ESG disclosures will increasingly address social considerations

Initiatives to improve corporate ESG disclosures will continue to gain traction in 2022, says Moody’s. The global push will continue to spotlight environmental risk, but there will also be emphasis on addressing social issues including human rights, labor issues, and gender and racial diversity. Greater focus on social and environmental risk management, as well as a strong push in some regions to enhance board-level independence, are likely to enhance transparency and credit quality over time.

The report – 2022 outlook : Amid new pledges, action on carbon, social issues to rise to the fore is available here.

ESG Credit Trends

Source: Moody’s – Global ESG Outlook 2022 – ESG Credit Trends to Watch in 2022