The Covid-19 pandemic is highlighting the importance of the “S” component of the environmental, social and governance (ESG) set of standards used by companies to screen investments and is pushing investors and banks to increasingly integrate social risks into their risk management and investment frameworks.  

Although the pandemic has inflicted massive damage on the financial markets and global economy, it should be regarded more as a social risk  rather than an environmental or governance one.

And while it’s still early days, the importance of social risk is beginning to seep into the consciousness of rating agency experts reviewing the impact the pandemic is having on the risk management frameworks of private and public sector credits.

Moody’s regards the coronavirus outbreak clearly as a social risk within its ESG framework given the substantial impact it is having on public health and safety and the credit implications that will continue to play out in the years to come.

“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,” Moody’s notes in its Q1 2020 ESG Focus report.

This sentiment is echoed in a broader sense by Andreas Karaiskos, Fitch Learning’s chief executive officer, who points out that the pandemic has magnified and exposed the social imbalances in the Asia-Pacific region and underscored the importance of financial inclusion and other social aspects of ESG.

Before the pandemic, investors and financial institutions traditionally saw the “S” in ESG more from the perspective of philanthropy and charitable works. While there is nothing wrong with this perspective, the pandemic is forcing investors and financial institutions to look at the social component from a broader perspective and make it an integral part of their risk management frameworks and investment strategies.

“While the health, economic and social crisis is creating untold strain on governments, businesses and individuals, it is also placing greater scrutiny on the social impact of corporate activity – on issues like financial inclusion, gender inequality and labour management – under the watchful eyes of the general public, policymakers and, just as significantly, the growing ranks of ESG and socially responsible investors,” Karaiskos says.

In the credit space, Moody’s has concluded that 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.

For example, emerging market (EM) sovereigns with lower credit ratings and large international bond maturities are facing significant rollover risk and higher refinancing costs.

“Given the local currency depreciation, a sharp increase in credit spreads, and dysfunctional primary markets for new issuances, unless some risk appetite returns, non-investment grade EM sovereigns will face significant costs refinancing maturing international bonds,” according to Moody’s.