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S&P Global Ratings believes global megatrends can become material to its credit ratings if they affect factors that contribute to its assessment of creditworthiness. Some megatrends have already led to credit rating changes and, depending on how they evolve, may do so in the future.
What We're Watching
Global megatrends—including climate change, increasing digitalization, geopolitical risks, aging populations, and disruptive technologies—are gradually reshaping our world in often unpredictable ways. With the power to transform societies and economies, megatrends can bring financial, economic, environmental, and other risks (alongside offering opportunities) across regions and sectors. The impacts of some risk trends may take several years to unfold, while others may emerge suddenly.
Our credit rating methodologies provide the analytical approach to capture factors linked to megatrends that can materially affect the creditworthiness of industries or specific issuers—or, in other words, the path to credit materiality.
We are mindful that a megatrend's path to credit materiality is not the same for all rated entities in all sectors and geographies. In our analysis, we take a forward-looking view of risks or opportunities that can alter the trajectory of the credit factors underpinning our ratings.
What We Think And Why
In our recent whitepaper, we detail how the potential impacts of megatrends are considered in our credit analysis. A multi-step process helps us monitor the potential evolution of megatrends, understand the key tipping points, and assess the likely impact on our credit ratings now and in the future.
First, we estimate the potential severity and likelihood (or magnitude) of the megatrend's potential implications for creditworthiness, irrespective of how or when such impacts might materialize.
Next, we assess how megatrends' effects could be transmitted to credit factors—such as competitive position, revenue, expenses, investment needs, access to funding, tax base, and jurisdictional factors. Credit impact transmission channels indicate how the megatrend could influence an entity's ability and/or willingness to repay its financial obligations. Our sector-specific credit analysis already reflects longer-term risks and opportunities emanating from the megatrend in situations where there is sufficient clarity about credit impact transmission channels. Conversely, there is likely to be no credit rating impact based solely on a megatrend in sectors and geographies where there is uncertainty regarding how risks and opportunities from that megatrend might affect creditworthiness.
For the sectors and geographies we consider to be typically most exposed to the megatrend, we subsequently define plausible scenarios involving relevant credit factors to conduct sensitivity analyses or stress tests for analytical purposes.
Armed with analytical insight and extensive data, we then conduct and evaluate the results of those analyses to determine the potential impacts of the megatrend on those sectors and geographies likely to be most exposed. These analyses and assessments would affect factors from our sector-specific rating methodology; be complemented by information identified from our interactions with issuers and other market participants; and could also entail deeper assessments of sectors or market dynamics.
Finally, we determine (where possible) the potential future rating impact on entities in sectors or geographies identified as highly exposed—with outcomes dependent on the scenarios used, sector's characteristics, time frame, applicable sector-specific rating methodology, and each entity's specific circumstances and business model.
What Could Change
It is inherently difficult to predict how, where, and when megatrends may develop; the severity and distribution of their impacts; or precisely how and when creditworthiness might be affected. Regarding the effects of megatrends, we recognize that the path to credit materiality is often not linear; can develop over different time frames; and may affect sectors and regions differently.
For example, we may determine that a megatrend's path to credit materiality may not emerge for at least the next five years for most rated entities, and that uncertainty remains significant after that horizon. But we also may envision rating pressure for some entities beyond that time frame if specific scenarios materialize. In this instance, we'd incorporate our view of how each rated entity is likely to manage the risks or opportunities posed by the megatrend—considering its financial situation, governance, technological and product flexibility, shareholders, and the legal and regulatory framework it operates in, among other factors. When making assessments over the medium- and long-term, we also make assumptions on potential mitigants an entity might put in place and their potential effectiveness.
Overall, the increasing availability of data and research can enhance market participants' understanding of how megatrends may affect factors relevant to our assessment of creditworthiness and our credit ratings.
Writer: Molly Mintz
This report does not constitute a rating action.
| Primary Credit Analysts: | Lapo Guadagnuolo, London + 44 20 7176 3507; lapo.guadagnuolo@spglobal.com |
| Gregg Lemos-Stein, CFA, New York + 212438 1809; gregg.lemos-stein@spglobal.com | |
| Hans Wright, London + 44 20 7176 7015; hans.wright@spglobal.com | |
| Secondary Contact: | Alexandra Dimitrijevic, London + 44 20 7176 3128; alexandra.dimitrijevic@spglobal.com |
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