Moody's - ESG Risks Vary Across Structured Finance Asset Classes and Regions

Moody's - ESG risks vary across structured finance asset classes and regions

•            Emissions rules and severe weather along with demographic and societal trends pose credit risks

•            Alignment of interests and adherence to documentation are governance risks that influence cash flow

Environmental, social and governance (ESG) issues pose higher credit risk to certain structured finance asset classes and certain global regions, with evolving regulations and shifting consumer demand exposing transactions to the potential for falling asset values or declining cash flow. According to a new report from Moody's Investors Service, structural features, short loan tenors and asset diversification help minimize ESG issues' credit negative effects on securitizations and covered bond deals.

“Environmental and social risks vary across structured finance asset classes, reflecting the sector's diverse array of transaction types and assets,” according to Moody's Vice President Inga Smolyar. “Governance considerations, in contrast, are generally issuer specific.”

Risks to asset values can come from emissions standards and other environmental rules. Aircraft and tobacco ABS, as well as project finance and infrastructure CDOs have moderate vulnerability to environmental risk while most other asset classes have low environmental risk.

Student loan ABS, particularly FFELP transactions, which have the highest exposure to payment plans and direct government control, are the only structured finance sector with high overall social risk. Asset classes are more likely to feature moderate social risk than moderate environmental risk, given that social risks represent a broader range of considerations.

The report includes detailed illustrations and narrative descriptions of relative ESG risks for every type of asset class across regions.