ESG factors were a material credit consideration in half of public-sector ratings actions by Moody's Investors Service in the past 15 months, the rating agency said Wednesday.
The report also clarified that ESG factors were not necessarily the key driver of its ratings actions.
Compared to 50% of the more than 6,900 ratings actions for public-sector issuers, Moody's found in a separate analysis that 33% of private-sector rating actions cited material ESG factors in 2019.
For public-sector rating actions citing ESG factors, roughly 19% were negative and 12% were positive, with the remaining 69% neutral. The distribution of negative rating actions varied across the three ESG issues, with social considerations having a larger percentage, 27%, related to negative rating actions compared to 18% for governance and 20% for environmental issues.
For public-sector issuers, the most frequently cited factors were governance considerations, while social factors were the most prominent issues in U.S. regional and local government rating actions, particularly those issues related to labor and income.
"The prominence of social considerations in our public-sector rating actions highlights that social factors are a core component of government credit quality," Moody's Senior Vice President Robard Williams said in a statement. "Social issues such as health and safety, demographics, labor force, income and education drive key aspects of credit quality for public-sector issuers. While such issues most often pose credit risks, they can also be a source of credit strength."
Moody's considers the COVID-19 pandemic a social risk that has also highlighted the credit materiality of key environmental and social issues. Business-like governmental entities in sectors immediately affected by the outbreak, such as airports and higher education institutions, saw an increase in rating actions that cited ESG issues, and the credit materiality of ESG factors is expected to increase because of the pandemic.