Coronavirus pandemic: The importance of ‘S’ in ESG

The rapid spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We expect that credit quality around the world will continue to deteriorate, especially for those companies in the most vulnerable sectors that are most affected by prospectively reduced revenues, margins and disrupted supply chains. At this time, the sectors most exposed to the shock are those that are most sensitive to consumer demand and sentiment, including global passenger

airlines, lodging and cruise, automakers, as well as those in the oil & gas sector most negatively affected by the oil price shock. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial impact it is having on public health and safety, with credit implications that will continue to play out in the years to come.

Besides the tragic loss of life, the coronavirus outbreak is stretching the capacity of healthcare systems and inflicting a steep economic and social cost through “shelter in place” mandates and business closures. Governments are implementing ambitious policy support measures to mitigate the economic impact of the pandemic. A sharp economic slowdown, which we so far assume to be temporary, and increased spending will weaken fiscal metrics.

We have defined social risk frameworks for both the private and public sectors, highlighting key social considerations as they relate to credit. Our social risk framework for private-sector issuers is centered around the social risks (and opportunities) that stem from an issuer’s interaction with its core stakeholders, including employees, customers, supply chain partners, counterparties or society at large.

Our public-sector framework focuses on areas that are core to the development of a society, and which are fundamental responsibilities of governments, such as health and safety, education, housing and access to basic services, as well as considerations of demographic trends and developments in and distribution of labour and income.

Amid coronavirus-related shocks, we expect the global economy to enter into a recession this year, with G-20 GDP contracting 0.5% in 2020, before recovering to 3.2% growth in 2021. The drop in business activity will be particularly severe in the first half of this year. While the policy responses to combat the downturn are becoming clearer, it remains uncertain how long it will take to contain the outbreak and how quickly economic activity will recover.