Environmental factors weigh negatively on the credit ratings of nearly all North American oil and gas companies, S&P Global Ratings said as it rolled out a new system rating the impact of environmental, social and governance issues on corporate credit. The scores will inform future corporate credit ratings.

The global transition to lower-carbon energy sources poses a credit risk to 96% of the oil and gas companies that Ratings covers. This category encompasses a company's carbon emissions and its efforts to minimize emissions and develop lower-carbon products, as well as the existential risk that oil and gas companies find their products severely restricted or outlawed, Ratings said Nov. 23.

"Environmental risk is the most relevant ESG category for the upstream oil and gas and refining sectors due to issuers' exposure to climate transition risk and the potential loss of market share to product substitution and renewables," Ratings said. "Pollution and spillages can also give rise to severe credit consequences."

The physical effects of climate change — such as floods, stronger storms and a rise in sea levels — pose a threat to oil and gas companies' infrastructure assets, but the sector's credit risk in this category is lower than the collective risk for all corporate entities.

Ratings' ESG credit indicator scores each area of ESG on a scale of 1 to 5, with 1 indicating the least risk and 2 being neutral. The system is skewed to the negative because Ratings believes that negative ESG performances have far more impact on a company's future than positive performances.

Most of the oil and companies covered by Ratings scored a 4 for environmental risk, 2 for social risk and 2 for governance risk in the first edition of ESG scores.

Social risk includes waste and pollution from operations as well as health and safety records. "Social capital can be impacted by spills and explosions, which can increase reputational risk," Ratings said. Governance factors include the political climate in countries where a company operates, organizational behavior and corporate governance.

The high environmental risk score reflects the inherent credit risks to the industry in the face of climate change and an evolution toward lower-carbon products, Ratings said. "By and large, social indicators were in the S-2 category, but where outcomes deviated it was largely driven by location of operations. Typically, companies with operations in deepwater offshore production/drilling or with a meaningful exposure to Canada oil sands were given an S-3 or S-4 indicator."

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.