Moody’s Links Financial Pressure to ESG Risk

As global regulations tighten, businesses are navigating a growing web of compliance demands and operational costs, all tied to ESG factors.

Moody’s 2025 ESG Outlook makes it plain: the financial landscape is changing, with rated debt now closely linked to climate risks and labour standards.

“Policymaker and investor focus on environmental and labour practices in supply chains... will raise operational and compliance costs as well as regulatory and reputational risks,” warns Moody’s.

The stakes are high—falling short could lead to financial penalties, tarnished reputations and even a hit to credit ratings.

Supply chain rules: Complex and costly

Starting in 2025, the European Union will require companies to comply with new sustainability reporting rules under the Corporate Sustainability Reporting Directive (CSRD) and the EU Deforestation Regulation.

By 2027, the Corporate Sustainability Due Diligence Directive (CSDDD) will expand these requirements further.

Adding to the challenge is the EU’s Carbon Border Adjustment Mechanism (CBAM). The initiative forces suppliers to disclose carbon emissions, prompting European importers to favour lower-carbon producers. Other nations are taking notice.

China is also broadening its Emissions Trading Scheme (ETS) to encourage decarbonisation, while similar carbon-pricing proposals are gaining traction in the United States.

The ripple effects are clear. Businesses face rising costs for compliance, reporting and reconfiguring supply chains. Companies in sectors including cocoa and palm oil—particularly those in emerging markets—are among the most exposed, given their inclusion under EU deforestation rules.

But it’s not just about ticking regulatory boxes. The reputational stakes are growing. Investors, consumers and regulators are paying closer attention to how companies manage their supply chains. For suppliers, retaining contracts often means investing in measures to mitigate social and environmental risks.

Plastics: A new environmental frontier

Plastics are emerging as a critical area in the ESG landscape.

Although a global plastics treaty remains elusive after talks ended without resolution in late 2024, the EU has forged ahead with updated recycling mandates. Its revised packaging directive sets ambitious recycling targets for 2025 and 2030 while imposing new restrictions on single-use plastics.

The shift places fresh demands on businesses in the consumer goods and beverage industries.

Companies will need to improve waste tracking, ramp up recycling efforts and invest in sustainable packaging solutions. While these changes drive costs higher, they create opportunities for manufacturers already using recycled materials.

As the availability of recycled content rises, these businesses are well-placed to capitalise on the growing demand.

Debt ratings reflect climate vulnerabilities

Moody’s analysis highlights a stark reality: ESG risks are already influencing debt ratings and the trend is accelerating.

Of the 12,610 entities Moody’s evaluates, 17% experience a negative impact on their ratings due to ESG considerations. For 3% of issuers, these factors lead to significant credit downgrades, while another 26% face limited but growing risks over time.

Industries with the highest exposure to climate risks—such as automotive, power and heavy industry—are feeling the squeeze. Moody’s environmental heat map identifies 16 sectors with US$5tn in rated debt, all carrying high or very high exposure to carbon transition risks.

The agricultural sector is increasingly in the spotlight, with natural capital conservation and land-use issues becoming central to decarbonisation strategies.

Meanwhile, emerging markets face a unique set of challenges. Despite advanced economies committing US$300bn annually in climate financing by 2035 at COP29, this falls far short of the estimated US$1tn required. Innovative solutions such as blended finance and sustainable debt will be essential to bridge the gap.

For advanced economies, the picture is brighter. Favourable economics, policy support and private-sector emissions commitments are channelling investment into clean energy projects.

Moody’s suggests that clearer regulatory definitions for transition finance could further support growth in green and labelled debt markets, while also easing concerns about greenwashing.

The path forward is clear; businesses must adapt swiftly to this evolving regulatory environment. From stricter supply chain rules to mounting climate risks, the demands on companies are escalating. Those that invest in sustainable practices, decarbonise their operations and embrace transparency will be better positioned to navigate these challenges.

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