Fifty-seven per cent of rated companies in Asia Pacific face environmental, social, and governance (ESG) risks on more than US$4 trillion in aggregated debt, according to a report by S&P Global Ratings.
The report, which was released Monday, disclosed the rating agency’s ESG credit indicators on more than 500 rated companies in China, India, Indonesia, Japan, Korea, Australia, and New Zealand, discussing the key ESG trends affecting these companies.
Environmental factors, most notably climate transition risks and waste and pollution, were found to have the most significant negative influence, impacting 40% of rated companies and almost US$3 trillion of debt.
With the agency’s rated universe skewed toward commodity and heavy industry sectors, these numbers reflect how energy mix and production processes in Asia often prioritise productivity and cost efficiency over decarbonisation targets, as well as the increasing need for export sectors such as automobiles, coal, palm oil or metals to adapt to the stricter environmental regulations set in Europe and North America.
The report also predicted that these companies will continue to be exposed to environmental risks in the next two years due to fossil fuels still accounting for the majority of the power generation mix in Asia-Pacific, most notably in China, India, and Southeast Asia.
“Rated companies exposed to E risks in Asia-Pacific have generally faced fewer environmental regulations and as a result have been slower than global peers in transitioning out of legacy business models,” said credit analyst Xavier Jean. “We think the current commodity prices upcycle also reduces the incentive and urgency for oil and gas, mining and agribusiness companies in the region to venture into sectors less exposed to E risk--despite likely rising pressure from stakeholders and capital providers.”
Governance factors, meanwhile, were found to negatively impact about 22% of rated entities, specifically influencing emerging markets such as China, India, and Indonesia. These results reflect how many of the rated companies in these countries are family-owned, often having less established governance structures and below average transparency and disclosure standards.
Additionally, social factors were found to have the least negative influence, affecting 19% of rated companies. Key credit factors, particularly social capital and health and safety, generally impact companies involved in mining and mobility, with both requiring high labour intensity. Other industries such as transportation, non-discretionary retail, and leisure were also identified in the report, having been the first sectors hit by the COVID-19 pandemic.
The full report, titled ESG Risks Negatively Influence Over US$4 Trillion Of Debt At Rated Companies In Asia-Pacific, is available at the S&P Global Ratings website: spglobal.com/ratings.
