The range of environmental and climate (E&C) risks — the E in ESG — is far-reaching. As defined by the Task Force on Climate-Related Financial Disclosures, E&C risks can include:
- “transition risk,” arising from the shift to a low-carbon economy
- “policy and legal risk,” associated with changing climate-change regulation
- “technology risk,” relating to the significant impact that technological improvements supporting an energy-efficient economic system can have on organizations.
With climate change and severe weather events receiving more attention — from the media, the public and central governments — financial market participants are becoming increasingly concerned about all aspects of E&C risk. Along with other market developments that focus on awareness of social risks, this is encouraging more comprehensive levels of ESG disclosure.
Indeed, ESG risks and opportunities are relevant to the creditworthiness of rated entities across multiple sectors, but the materiality and visibility of those factors can differ by entity, industry and country, and they can change over time.
Ultimately, increased understanding of ESG factors and enhanced ESG disclosure by companies could make the further incorporation of ESG factors into credit ratings more consistent and transparent for all sectors.
Sources: All texts, content, quotes and graphics by S&P and GreenBiz. All credits to S&P and GreenBiz.