NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, July 10, 2014

NEW YORK — It’s not without rhyme or reason that a credit rating agency like Moody’s Investors Service suddenly takes an interest in the impact investing field. For Mark Tulay, founder and CEO of Sustainability Risk Advisors and Sustainability ROI, this institution has good reasons to do so. “Credit raters see that climate change could, or likely will, lead to an environmental crisis that will create the next economic crisis,” said Tulay at the TBLI CONFERENCE USA 2014.

Seeing the writing on the wall, credit agencies are exploring new partnerships and services, such as impact investing, that might help offset the climate problems awaiting us. Moody’s clients, who are corporations, government entities and structured finance securities, also have valid reasons to fear this coming threat. As a result, they are turning to new strategies to take into account future environmental challenges.

“Managers believe that there is some increasing value in ESG factors and risks. They are actively employing those factors in their strategies,” said Henry Shilling, senior vice president at Moody’s Investors Service. Financial institutions such as asset management companies have integrated environmental, social and governance factors, or ESG, in their investment strategies. Until now, the emphasis has been on the equity space, but it is currently turning to the fixed-income space, which has a larger potential.

But it all comes back to “how do you determine when will the financial impact of climate change hit the companies’ bottom line,” Tulay said. That is the question that many economic actors are asking themselves. To respond to its own preoccupations, Moody’s is turning to impact investing because it aims to reduce humankind’s footprint on the environment with “investments made into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return,” according to the Global Impact Investing Network (GIIN).