ESG risks in Latin America are negative but lower than emerging markets average – Moody’s

RIO DE JANEIRO, BRAZIL – Rating agency Moody’s said Wednesday in a report that credit exposure to environmental, social, and corporate governance (ESG) risks in Latin America and the Caribbean is negative, but lower than the average of other emerging market regions.

In a report, Moody’s said that although the “overall impact” of ESG in Latin America and the Caribbean “is negative,” there are wide variations within the region, reflecting both the different levels of exposure to these risks in each country and their varying capacities to address them.

Moreover, as noted by Gabriel Torres, vice president of the rating agency and lead author of the report, while “less than 10% of countries in the region have credit impact scores that are ‘very highly negative,'” “nearly 20% of all rated emerging markets have such a score.”

“ESG credit impact scores for countries in Latin America and the Caribbean denote lower exposures to environmental risks and comparatively higher income levels, elements that increase resilience to ESG risks relative to other regions,” Torres explained.

In terms of environmental risks, Moody’s noted that almost all countries in the region are “moderately exposed,” but vulnerability increases in the Caribbean, with its many small island economies exposed to hurricanes and rising sea levels.

Overall, climate risk is the most relevant environmental credit exposure factor for Latin American and Caribbean countries. Issues such as carbon transition affect a small number of the region’s oil-exporting economies.

On the other hand, the report indicates that exposure to social factors is mostly negative in Latin America and the Caribbean, “reflecting a history of inequality” and “unmet social demands.”

“High levels of income inequality, weak labor markets, and lack of access to basic services and health care are key credit concerns that have been exacerbated by the Covid-19 pandemic,” the report notes.

According to the rating agency, “countries such as Chile, Colombia, and Peru face high social demands and have experienced protests and political turmoil in recent years driven by the inability of governments to address those demands effectively.”

As for credit exposures linked to governance, these “show high variation, reflecting the different institutional arrangements in the region.”

According to the report, governance-related credit exposure scores range from “positive” in the Cayman Islands and Chile to “very highly negative” in Argentina, Ecuador and Nicaragua.