The ongoing COVID-19 crisis is expected to sharpen focus on environmental, social and governance (ESG) risks with increased relevance to credit – revealed a new report from Moody’s Investors Service.
“The coronavirus pandemic has vividly illustrated how a social issue like a public health shock can have severe macroeconomic and credit implications. Entities demonstrating a stronger capability and willingness to address such ESG risks will increasingly differentiate themselves from their peers over time,” said Moody’s Investors Service AVP-analyst Matthew Kuchtyak.

According to the report, there will be greater focus on corporate preparedness for global risks with investors increasingly probing corporate governance and risk management practices.

To avert the worst effects of such risks, Moody’s anticipates corporate actions such as reviewing and optimising insurance coverage, instituting broader and more explicit risk management policies as well as developing rapid response action plans for risks.

Addressing ESG risks

The report also noted that the pandemic may accelerate a shift at companies away from the perspective that shareholders are their leading constituency to a broader view that considers multiple stakeholders, including clients, employees and their communities.

The acceptance of a stronger social aspect to corporate strategy is expected to underscore the links between a company’s reputation and the way it addresses ESG risk factors, said Moody’s.

During the current pandemic, various corporate business practices have received increased scrutiny including the ways in which a company protects the health and well-being of its staff, whether it has a propensity to furlough workers or make them redundant, their pay and labour practices and their shareholder return policies.

Heightened public attention on corporate responses to the pandemic has already shown signs of influencing behaviour, stated the report.

For instance, a couple of insurers have faced societal and competitive pressures to refund profit from expected lower loss rates back to their clients as well as extend pandemic risk coverage beyond their contractual liability.

These insurers have been under strong pressure from certain governments and societies to pay coronavirus-related claims that are currently not covered by existing language such as business interruption insurance.

Additionally, they have also been asked to accept delays in premium payments without cancelling coverage and to provide other forms of financial relief to their customers.

Such pressures have affected companies from a wide range of sectors and may lead to these companies encountering higher costs and lower profitability.

However, the Moody’s report reiterated that companies that can successfully adapt their strategies in response to ESG considerations have an opportunity to differentiate themselves, thus improving their competitive positions.

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