Economic and political turbulence caused by the COVID-19 pandemic and Russia’s invasion of Ukraine will be likely to heighten environmental, social and governance (ESG) credit risks this year, credit rating agency Moody’s said on Monday.

The cost-of-living crisis stemming from high food and power prices amid supply issues related in part to the Ukraine war is likely to raise credit risks across a range of sectors.

“Policymakers will face increasingly difficult trade-offs between supporting vulnerable households and restoring fiscal positions that have yet to fully recover from the impact of the pandemic,” Moody’s stated.

Among trends identified for 2023, company emission reduction efforts would come under increased scrutiny as more ambitious, transparent and credible objectives are required by investors despite short-term energy security concerns.

“The rapid crystallization of climate change-related risks have highlighted the need for rapid decarbonization and scaling up of adaptation finance, bringing longer-term environmental risks into sharper relief,” Rebecca Karnovitz, vice president – senior credit officer at Moody’s Investors Service, said in a statement.

“Those that do not meet stakeholder expectations will be exposed to growing policy and market risks,” Moody’s wrote in a report. “In particular, companies could see their cost of capital increase if investors lose confidence in their ability to manage the transition to a low-carbon economy.”

Worker wage demands could also lead to operational disruptions, the rating agency said, while many consumer-facing industries will suffer from slower spending and high input costs.

Moody’s said against the tougher market backdrop, lower-rated issuers, particularly those rated B3 and below, would face higher refinancing risks, given their often weaker risk management capabilities or exposure to leveraged capital structures, in the case of companies.

(Reporting by Juliette Portala, editing by Simon Jessop and Jane Merriman)