Social Issues Pose Widespread Credit Risk

In the wake of global protests spanning from London to Hong Kong, Moody’s has released a report detailing the impact that social considerations may have on the credit quality of approximately $78 trillion worth of rated debt across 82 sectors of the global economy.

The report groups the risk due to societal considerations that a sector can be exposed to into four categories, ranging from “low” to “very high”. Moody’s measured these risks by categorizing the different societal factors that impact industries in the private and public sectors.

The societal factors impacting the private sector were (i) customer relations, (ii) human capital, (iii) responsible production, (iv) demographic and social trends and (v) health and safety. While increased awareness of environmentalism is the “cause célèbre”, Moody’s concluded that forty-nine sectors with $63 trillion in rated debt have a “very high” or “high” exposure to at least one societal factor, compared with only twenty-six sectors, with roughly $12 trillion in rated debt, having equivalent risk exposure as a result of increased awareness of environmentalism.

This broad based exposure to societal risks plays out in the financial services industry. For example, banks and financial companies, with $13.3 trillion in rated debt, are at a moderate risk level due to a combination of customer relations and demographic and societal changes. Within these two broad societal factors, Moody’s identifies cybersecurity and privacy issues and the growing preference among consumers for online/electronic banking as the largest risks to banks and financial companies. Two examples that Moody’s cited as evidence of the risk posed by cybersecurity and privacy concerns (a subset of the customer relations category) are the potential for a financial services company to mishandle confidential customer information or be targeted by malicious actors. Moody’s pointed to the growth of companies like Venmo, which may pull customers away from traditional banking institutions, as an example of risk posed by changing demographic and societal changes.

In contrast, the societal factors impacting public sector companies are (i) shifting demographics, (ii) access to affordable housing and the condition of housing, (iii) labor force participation and income inequality, (iv) the health and safety of the populace, (v) the education of the populace and (vi) the ability to access basic services. While these risks impact all public sector companies, the groups most impacted are emerging market sovereigns and regional and local governments. The factors that have the largest impact on emerging market sovereigns and regional and local governments are access to basic services (such as infrastructure – crucial for economic growth) and the low education of the populace, which in turn fuels lower participation in the labor force and leads to greater income inequality.  However, unlike sovereigns in advanced economies, emerging market sovereigns and regional and local governments are less capable of dealing with these challenges because they lack both large, diverse economies and the strong governmental institutions necessary to overcome these issues. While the above mentioned factors impact the private and public sectors in different ways, and certain sectors are better equipped to handle such impacts, the threat to credit quality is still present across all sectors. The recent demonstrations in both advanced and emerging markets have highlighted how quickly social situations can change.