ESG Industry Report Card: Telecoms
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
ESG Industry Report Card: Telecoms
February 11, 2020
PRIMARY CREDIT ANALYST
Key Takeaways Mark Habib
Paris
- The telecom sector has above-average exposure to social risks as it is exposed to several (33) 1-4420-6736
public confidence factors, including the protection of client data and the fidelity of mark.habib
@spglobal.com
telecom networks.
SECONDARY CONTACT
- Some social exposures, like data breaches, could translate into governance risk through
Pierre Garin
increased regulation or fines. Governance risk can also weigh on ratings in emerging
Paris
markets that have less transparency and predictability.
+ 33140752507
- Although the sector currently has below-average credit exposure to environmental risk, pierre.garin
@spglobal.com
many operators focus on this risk, which is highly visible and will probably gain
ADDITIONAL CONTACT
importance because of the rapid growth of data traffic. Green bond issuance and other
environmental initiatives from the sector indicate the importance and measurability of Industrial Ratings Europe
increasing energy efficiency. Corporate_Admin_London
@spglobal.com
Analytic Approach
Environmental, social, and governance (ESG) risks and opportunities can affect an entity's
capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these
considerations into its ratings methodology and analytics, which enables analysts to factor in
short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of
their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness
(see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis,"
published Sept. 12, 2019).
Our ESG report cards qualitatively explore the relative exposures (average, below, above average)
of sectors to environmental and social credit factors over the short, medium, and long term. For
environmental exposures, chart 1 shows a more granular listing of key sectors and (in some cases)
subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison
is not an input to our credit ratings and not a component of our credit rating methodologies; it is
based on our current qualitative, forward-looking opinion of credit risks across sectors.
In addition to our sector views, this report card lists ESG insights for individual companies,
including how and why ESG factors may have had a more positive or negative influence on an
entity's credit quality compared to sector peers or the broader sector. These comparative views of
www.spglobal.com/ratingsdirect February 11, 2020 1ESG Industry Report Card: Telecoms environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency. Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, and privacy (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score. The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates. S&P Global Ratings considers that the most meaningful ESG credit risks for the www.spglobal.com/ratingsdirect February 11, 2020 2
ESG Industry Report Card: Telecoms telecommunications industry relate to social exposures stemming from data security, social cohesion, and safety management risks. Although growth in data traffic could materially increase energy use, other forms of environmental exposure are lower because the industry makes little direct and indirect use of water and its contributions to waste, pollution, and toxicity are relatively low. Governance-related factors are more company- and region-specific, and primarily relate to jurisdictional uncertainties in emerging markets. Exposure to social and environmental risks has only a modest impact on our credit analysis for the telecoms sector, with social risks being more prominent than environmental. That said, because environmental risks are more quantifiable than other ESG risks, the sector has focused more of its reporting in that area. The individual risk factors, associated time horizons, and mitigating factors vary by company. Social Exposure The telecom sector has above-average exposure to social risks, compared to other industries, as any incidents related to data security and systems stability in the telecoms sector will be highly visible given the sector's extensive reach. Reputational consequences among consumer and business customers could be followed by regulatory or legal requirements that would affect governance exposure. For similar reasons, security concerns over an equipment supplier could also trigger a shift in public perception, or an outright regulatory ban. A ban would weigh on costs and could cause delays to network projects. Loss of access to a supplier's technology could also affect service quality and may require the costly and disruptive replacement of equipment. A continuing topic of debate in recent years has been the societal effect of excessive use of social media, particularly among younger users. As the effect of misinformation in the media has become clearer, pressure to reduce or change usage patterns could increase. We see only a slim probability that this would depress demand for telecom services materially. In assessing social risk, we consider public confidence in operators' engagement with the community and in corporate citizenship. Given the sector's large and ethnically diverse customer base, community relationships and sensitivity form low, but important social risks to brand value and customer satisfaction that are distinct from typical quality and service issues. Telecom companies also typically have large workforces that are significantly unionized. This makes human capital management another key social risk, although the credit impact of a work stoppage on individual telecom companies is not as material as in other sectors, like heavy manufacturing. The industry's technicians are associated with safety management risks, as are the personnel that build and maintain the telecom infrastructure, including towers and data centers. Another nascent, but notable, social risk stems from potential health concerns regarding exposure to electromagnetic frequency (EMF) radiation from high-frequency fifth-generation (5G) telecom equipment and devices, which use a higher frequency and have a denser network of radio antenna. This could affect consumer perception and usage of telecom services, though we believe ongoing medical studies will take time to resolve the matter definitively, if at all. www.spglobal.com/ratingsdirect February 11, 2020 3
ESG Industry Report Card: Telecoms Environmental Exposure We currently perceive exposure to environmental risks as below average but rising. Although the sector uses energy to power its communication networks, data centers, and operations, its usage is less intensive than that of sectors like utilities or natural resources. According to Statista, a German online statistics portal, the telecoms sector contributes about 2% of global carbon dioxide emissions. However, rapid increases in data traffic can quickly increase energy consumption in the sector. As a result, the sector has turned its attention to increasing its energy efficiency for the powering of its communication networks, data centers, truck rolls, call centers, points of distribution, and IT systems. We have also begun to see telecoms companies like Telefonica and Verizon issuing green bonds. For example, fiber to the home (FTTH) is about 85% more energy-efficient than copper networks, because it reduces the need for cooling systems and the number of central offices. Deployment of FTTH is likely to be fueled by the need to improve speed to customers, but wider use of this technology will also help to achieve energy reduction targets. Exposure to physical climate change risks is largely based on the effect extreme weather--for example, hurricanes, tornadoes, ice storms, or flooding--would have on telecoms operating infrastructure and customers. We consider the credit risks to be modest, except for some smaller telecom operators that are narrowly focused on certain hurricane-prone markets. We classify the perceived health risks of electromagnetic field radiation as a social exposure, pending further studies. Should health risks turn out to be justified, we would treat the risk as we do other forms of pollution, as an environmental risk. Governance Exposure Many governance-related factors are company-specific or region-specific. Jurisdictional uncertainties in emerging markets, for example, can lead to regulatory and litigation risk. In addition, regulatory or operating frameworks such as those used to run spectrum auctions or regulate subscriber identity module card registration--may be unpredictable, resulting in unexpected outcomes or delayed decisions. In some instances, government regulation can itself affect operations--for example, restrictions on the use of voice over internet protocol (VoIP) services can have clear implications for data usage and, ultimately, revenue potential. In some countries, the government views telecom operators as providing a service, more like a public utility. Operators may be subject to service obligations that affect capital expenditure and return on capital. For example, they may be obliged to build a physical network in rural areas. www.spglobal.com/ratingsdirect February 11, 2020 4
ESG Industry Report Card: Telecoms ESG Risks In Telecoms Company/Rating*/Comments Analyst Altice Europe N.V. (and related entities) (B/Negative/--) Mark Habib Governance issues have contributed to our negative rating actions on Altice over the past two years. Its business model depends on growth through acquisitions, followed by sharp cost reductions. Although this strategy has materially boosted profitability at acquired assets, it puts a strain on management and governance effectiveness. Weakened employee morale and customer service also contributed to poor operating performance in 2017-2018. Altice's content investments have also been unprofitable, forcing it to take corrective actions at its Altice Studios business, which is still recovering. Although we consider governance risk compares poorly with peers, its environmental and social exposures are on a par with them and have not had any ratings impact. That said, the company has not yet publicly disclosed any carbon emission or energy consumption reduction targets, unlike many peers. America Movil S.A.B. de C.V. (A-/Negative/--) Luis Martinez Cybersecurity is a real risk for AMX, which operates in Latin America, where the number of cyberattacks is increasing by more than 10% a year and technical and law enforcement capabilities still lag those of developed markets. Although AMX hasn't reported any cybersecurity incidents, if a system breach or data loss were to occur, it could trigger costly legal proceedings and damage the company's reputation and financial standing. That said, AMX's strong corporate governance supports its effective operations. Its improved profitability over the past few years demonstrates that it has the financial and managerial capacity to cope with changing regulations. AMX operates in markets exposed to adverse weather conditions and natural disasters, but we consider it is well equipped to contain interruption risks. ESG risks have not had a significant impact on our ratings on AMX. AP TeleGuam Holdings Inc. (B+/Stable/--) Ryan Gilmore Teleguam's geographic concentration in a typhoon zone exposes it to more environmental risk than its peers. Events such as earthquakes and typhoons could affect the company's infrastructure and customers. For example, it suffered a significant service interruption in 2015 due to Typhoon Dolphin. Teleguam uses buried wireline infrastructure, which offers some protection against these risks, but it also relies on above-ground infrastructure to provide wireless service. We factor these risks into our business risk assessment. AT&T Inc. (BBB/Stable/A-2) Allyn Arden AT&T's 2018 acquisition of Warner Media, which now accounts for about 20% of total revenue, increased its exposure to the social risks associated with the media sector, such as data security, content regulation, and social media activism. AT&T's advertising business, Xandr, aims to expand its targeted advertising by collecting consumer data that is sensitive and must be kept confidential. Any theft of either consumer data or intellectual property (IP) could materially harm AT&T's reputation. AT&T has a very large workforce of about 260,000 employees, of which over 40% is unionized. As a result, the company is subject to periodic work stoppages that can hurt business operations. To date, work stoppages have not affected the ratings, although we view this as a moderate credit risk. Although AT&T is exposed to some environmental risks, such as greenhouse gas (GHG) emissions from its vehicle fleets and data center operations, the credit impact is low. Its goal is to reduce carbon emissions to one-tenth of its current level. It has introduced four new wind energy centers to help achieve this aim. Aventiv Technologies LLC (B-/Negative) Justin D Gerstley Aventiv is more exposed to social risks than telecom industry peers, because it is one of two rated companies that offer prison phone services, which have proved controversial. Advocacy and civil rights groups have drawn the media's attention to the high calling rates for inmates and the commissions that facilities receive from providers. As a result, private-equity owner Platinum Equity LLC is reviewing the company's business practices and may lower the rates charged to inmates. Platinum has also announced a realignment of the business. It will diversify to newer technology from phone calls, exposing Aventiv to execution risk as profitability is reduced to fund research and development. We view Aventiv’s competitive position as weak because increased political pressure could increase regulation and prison reform could reduce the number of inmates, shifting revenue streams, and increasing uncertainty regarding return on investment. Under a different administration, the FCC could lower rate caps for interstate calls in future. That said, the FCC has no authority over intrastate calls, which represent the majority. Individual state and local governments would need to implement rate caps on these. Although such changes are unlikely to be instant, they represent a long-term threat to the company's business model, in our opinion. A more serious threat comes from the push for free calls for inmates, funded by local governments, which could negotiate lower rates. New York City and San Francisco have recently adopted this model. Given Aventiv's elevated financial leverage, we see the potential for such social factors to discourage investors as a greater problem for the company than others. Refinancing Aventiv's debt could become harder if its pool of its potential lenders shrinks. Axiata Group Bhd. (BBB+/Stable/--) Yijing Ng Axiata is exposed to regulatory risks, particularly in its emerging market operations. For example, Axiata operates in Nepal through Ncell. It was given full clearance by Nepal's Large Taxpayers Office (LTO) after it paid capital gains tax in 2017, following its purchase of Ncell. However, the LTO brought further claims in April 2019, which Axiata is contesting. Although the company is not currently exposed to any other material regulatory risk, if Axiata increases its presence in emerging markets, we consider increased regulatory risks to be inevitable. www.spglobal.com/ratingsdirect February 11, 2020 5
ESG Industry Report Card: Telecoms
Axiata has undertaken initiatives to build green structures, increase its energy efficiency and invest in renewable energy technologies in
order to reduce carbon emissions. For example, through edotco, it has constructed bamboo telecommunication towers in Bangladesh and
is installing green energy sites. It is also looking to bring bamboo towers to its other markets. edotco has created green energy sites by
converting existing sites to use alternative sources of energy for power, instead of diesel. Axiata reduced its carbon emissions by 44% in
2018, from the baseline in 2013, exceeding its own target of 40%. Axiata is now developing new targets.
BCE Inc. (BBB+/Stable/NR) Aniki
Saha-Yannopoulos
BCE is the largest cable and direct-to-home (DTH) satellite operator in Canada, exposing it to social risks concerning data security,
government regulations, and social media activism. Like its peers, it holds data intended to help it expand its future network facilities and
broadcasting content. Any theft of either consumer data or IP could harm BCE's reputation and could cause its regulator, the Canadian
Radio-television and Telecommunications Commission (CRTC), to impose fines or operational constraints. Its main source of environmental
risk is its large fleet of customer support vehicles. Neither social nor environmental risks are unusual for the industry. BCE aims to reduce
its carbon dioxide emissions to 75% of its 2014 levels by the end of 2020; it has reached 65% of this target and is actively pursuing electric
transport solutions. BCE's strong management and governance reflects its strategic positioning and operational effectiveness.
Bharti Airtel Ltd. (BBB-/Watch Neg/--) Ashutosh Sharma
Bharti Airtel currently uses diesel generators to power its telecom base stations, exposing it to a low level of environmental risk. It is
managing the risk by moving toward renewable alternatives such as solar panels. The company aims to eliminate all diesel consumption
under its direct control by 2030 and increase its renewable energy consumption by more than 50% by 2020, using 2014-2015 as a baseline.
In emerging regions like India and Africa, the social risks that many telecom players are subject to are still at nascent stage. Bharti Airtel's
environmental and social exposures are thus similar to those of local peers and we view governance as neutral to the ratings. Its
management is very experienced and its financial disclosures, transparency, and timeliness of communications with investors are better
than Indian peers and on a par with global peers.
Block Communications Inc. (BB-/Stable/--) William Savage
Block is more influenced by social and governance considerations than most telecom and cable peers. It relies on CEO and controlling
shareholder Allan Block for strategic direction and there are long-standing family ties to the group's unprofitable unionized newspaper
business. With demand declining rapidly, negotiations with the union make cost-cutting initiatives more difficult. We capture these factors
in our rating in several ways. Our business risk assessment incorporates the weak profitability of the group's publishing arm, and negative
cash flows weigh on our financial profile assessment.
Bouygues S.A. (A-/Stable/A-2) Justine Miquee
Governance factors underpinned the recent upgrade of Bouygues to 'A-' from 'BBB+'. We consider the group's shareholding and managerial
structure, in which the Bouygues family and employees have more than 50% of voting rights, has helped build a solid track record of reliable
governance. This supports our confidence in the group's long-term strategy and sustainability. Growing concerns about energy and
ecological performance could also help the group's operations grow. Bouygues contributes to sustainable urban environment through
renovation works, soft mobility, and urban services projects, as well as offering sustainable construction. Bouygues Construction and
Bouygues Immobilier have pledged to reduce their carbon footprints by 2030--Bouygues Construction by 20%, relative to 2015, and
Bouygues Immobilier by 30%, relative to 2017. The group's Colas construction subsidiary contributes nearly three-quarters of its
emissions--mainly by laying asphalt for road construction and maintenance. This makes reducing carbon emissions more difficult because
most of Colas' emissions stem from purchasing the raw material, which is derived from oil. Nevertheless, Colas aims to reduce GHG
emissions derived from its direct energy uses, and to reduce the energy and GHG content of its end products. In absolute terms, scope 3
emissions were about flat at group level in 2018, but the group did manage to reduce carbon intensity as a proportion of sales.
BT Group PLC (BBB/Stable/A-2) Osnat Jaeger
Following the discovery of improper practices in the Italian business in the financial year ending March FY2017, we revised down our
assessment of BT Group's management and governance to fair. Although we did not lower the rating, the issue did cause EBITDA to fall by
about £170 million and cash flow by £450 million, affecting the valuation of BT's Italian business. The Italian authorities could still pursue
litigation related to these events. However, the weak oversight was restricted to the Global Services division, rather than the core U.K.
operations. BT has since refreshed its processes and controls across the group. The company is committed to reducing its exposure to the
social risks stemming from privacy and security concerns. In addition to reputational risks, the U.K. intelligence services has raised
concerns. As a result, BT has multi-vendor strategies in all fixed and mobile, core and access networks, to mitigate against supply chain
risk, and a long-term policy not to use Huawei equipment in its fixed core. It is removing Huawei equipment from the core network of its
mobile unit, EE. BT is under considerable pressure from users and its regulator, Ofcom, to increase investment in FTTH, because coverage in
the U.K. lags that in most of Europe. This weakens its cash flow profile and somewhat constrains the rating. Meanwhile, environmental risks
are low. After achieving 80% reduction in carbon emissions intensity ahead of its 2020 target, BT now aims to cut carbon emissions
intensity by 87% by 2030, and to be net-zero by 2045.
Bulgarian Telecommunications Company EAD (Vivacom) (BB-/Watch Neg/--) Justine Miquee
Vivacom's holding company has a track record of late refinancing and debt maturity extensions, which were the consequence of legal issues
concerning former shareholders. That has previously caused rating actions. For instance, in June 29, 2017, we placed Vivacom's rating on
CreditWatch with developing implications because of refinancing risk linked to upcoming debt maturities in 2018. In 2018, the energy
www.spglobal.com/ratingsdirect February 11, 2020 6ESG Industry Report Card: Telecoms consumed by Vivacom generated 69.1 kilotons of carbon emissions (direct and indirect), representing a 6% increase from 2017, while mobile data traffic increased by more than 60% over the same period. We believe this reflects the company's efforts to improve energy efficiency, although it has not yet publicly disclosed any carbon emission or energy consumption reduction targets, unlike some peers. Also, the group is investigating alternative energy sources and means of reducing consumption, such as optimized cooling systems, more energy-efficient networks and facilities, or optimized travel routes for its technical teams. Cable & Wireless Communications Ltd. (BB-/Stable/B) Fabiola Ortiz The company's geographic concentration in a hurricane zone exposes it to greater environmental risk than its telecom peers, which we factor into our business risk assessment. For example, in 2017, Hurricanes Maria and Irma caused massive damage to critical infrastructure, affecting power supply and transmission system for an extended period in a number of markets in which the company operates in the Caribbean. The significant service interruption took about a year to fully restore, depressing 2017's revenue by $10 million and adjusted EBITDA by $17 million. Although the company restored all of its fixed and mobile services, the additional costs incurred also affected its financial performance. Charter Communications Inc. (NR/--/NR) Chris Mooney We view Charter's level of ESG risk as typical for the telecom sector. Like its peers, Charter is exposed to social risks related to data security and regulatory risks because it has access to confidential consumer data. If either consumer data or IP is stolen, it could materially harm Charter's reputation, and lead to legal or regulatory actions. Although Dr. John Malone stepped down from Charter's board in 2018, he still has meaningful influence over the company's direction through his stake in Liberty Broadband, which owns 25.01% of the voting rights in Charter. We do not view this structure as detrimental to corporate governance. Dr. Malone neither controls the company nor has he placed his own interests above those of the other shareholders. China Mobile Ltd. (A+/Stable/--) Xin Hui Zu China Mobile has a solid track record of strategic and operational execution, a highly experienced management, and prudent risk management, supporting our view that its governance is stronger than that of its large Chinese corporate peers. China Mobile is 73%-owned by the state and listed in Hong Kong. It maintains sound corporate governance practices and disclosures and is one of only eight state-owned enterprises (SOEs) that have received the top grade ever since the state started its annual assessments of SOE operations 15 years ago. Because of China Mobile's extensive coverage and dominant position in China's telecom industry, any data security and system stability issues would be highly visible. Nevertheless, social risk factors are low. China Mobile is managing its privacy and data protection risk factors by enhancing its internal regulations, building security control capabilities, and undertaking active monitoring, with zero major customer information leakage events recorded in 2018. Given the Chinese government's strong commitment to developing 5G technology, China Mobile is ramping up its 5G investment. However, the lack of economies of scale and insufficient commercial use-cases in the early stages will lower China Mobile's return on invested capital. Although environmental exposure is not a material ratings driver, China Mobile is addressing the issue. In 2018, various energy-saving measures enabled the company to reduce overall energy consumption per unit of information flow by 57%. It expected to reduce consumption by a further 15% in 2019. Chorus Ltd. (BBB/Stable/--) Ieva Erkule We view regulatory and social risks as key to our rating on Chorus. Environmental risks are in line with peers'. Chorus has a telecommunications service obligation, established through an agreement with the Crown, under which it must maintain certain coverage and service on the copper network in New Zealand. Chorus' supply chain carries risks and requires the company to monitor and manage different parts of the supply chain. In April 2019, Chorus released an independent review, after breaches of employment law were identified among a number of small businesses subcontracted by two of Chorus' service companies. Although there were no allegations that implicated Chorus directly, the Labour Inspectorate identified allegations of poor treatment of migrant workers among Chorus' subcontractors' workforce. Chorus has put a number of structural improvements in place and is working with service companies to create a fairer supply chain, including introducing appropriate safeguards. Following an audit of all of Chorus' subcontracting companies, 38 subcontractors have ceased work on Chorus' network. We do not view environmental exposure as a material risk to the rating. Chorus is addressing the issue through its greenhouse gas emission and e-waste management programs. The company targets an 80% reduction in scope 1 and 2 emissions by 2030, from its base in the financial year ended June 30, 2012. CK Hutchison Holdings Ltd. (A/Stable/--) Edward Chan CK Hutchison's infrastructure, utilities, and energy businesses are exposed to environmental risks such as the emission of GHG and pollutants. The company is proactively managing these risks by adopting cleaner fuel such as natural gas, and installing selective catalytic reduction systems on its power generation business. It is also recycling water in its energy business. Environmental initiatives at CK Hutchison's telecom business include switching to renewable power sources, and encouraging electronic waste reduction. Nonetheless, the group has not publicly disclosed specific targets on carbon emissions or energy consumption, unlike many peers. From a social perspective, CK Hutchison is committed to a diverse culture and follows a stringent antidiscrimination employment policy. It is also committed to ensuring compliance with local and international laws, rules and regulations by having zero-tolerance for corruption and fraud. Comcast Corp. (A-/Stable/A-2) Naveen Sarma As a global diversified communications and media company, Comcast's exposure to ESG risks is similar to that of the broader industry. Its social exposures include data security and social media activism. It also faces social risks if the film and television content it produces through NBCUniversal is considered offensive or controversial. In addition, the Federal Communications Commission (FCC) could impose monetary fines and, in extreme cases, could pull the broadcast licenses for NBC's TV stations. Like many of its peers, Comcast has two www.spglobal.com/ratingsdirect February 11, 2020 7
ESG Industry Report Card: Telecoms classes of stock. The class B super voting stock solely owned by chairman and CEO Brian Roberts gives him 33% voting control, despite having an approximate 1% economic interest. We do not view this structure as detrimental to corporate governance. Mr. Roberts neither controls the company, nor has he placed his own interests above those of the other shareholders. Deutsche Telekom AG (BBB+/Watch Neg/A-2) Xavier Buffon Deutsche Telekom's exposure to environmental and social risk factors is comparable with the broader telecom sector. The group's energy consumption is its main environmental consideration--although energy costs represent a relatively small share of DT's overall cost base, it views energy efficiency and reduced GHG emissions as key performance indicators. DT has been slower to roll out energy-efficient FTTH networks than some of its peers but 52% of the energy it consumed in 2018 came from renewable sources--DT aims to raise this to 100% by 2021. Some of DT's European competitors are behind it in switching to renewable energy, such as Vodafone with 15%, but DT still lags behind companies, such as Telefonica with 58%. The group intends to cut its carbon dioxide emissions by 90% by 2030, compared with 2017. DT's ongoing migration to all-Internet Protocol networks and its plans to scale up FTTH deployment over 2019–2021 should also help limit pressure on energy costs. Sensitivity to data privacy and security issues is especially high in DT's home market in Germany--more than 90% of survey respondents consider protection of personal data to be relatively or very important. DT must therefore comply with the highest standards on data protection, security, and the prevention of cyberattacks, which carries an incremental cost. Germany also has strong trade unions, which can lead to cost inflation. About 52% of the group's employees are covered by collective bargaining agreements. To achieve its targets for EBITDA growth in Germany, DT needs to offset upward pressure on salary-related expenses through other cost efficiencies. DISH Network Corp. and DISH DBS Corp. (B/Negative/--) Chris Mooney U.S.-based DISH Network is more affected by governance factors than its peers, because controlling shareholder Mr. Charlie Ergen could place personal interests ahead of creditors. Mr. Ergen has a vision for a nationwide wireless network that will cost at least another $10 billion to build and has historically structured deals in a way that provides maximum flexibility. This could raise credit risk over time, depending on financing sources and structure, partnerships, and the company's ability to gain traction in the competitive wireless market. Emirates Telecommunications Group Company PJSC (Etisalat) (AA-/Stable/A-1+) Rawan Oueidat Etisalat's exposure to ESG risk factors is comparable with the broader telecom sector. Its exposure to governance and environmental risks is the most notable, but not currently a rating driver. Etisalat is exposed to pronounced governance risk in the international markets where it generates about 40% of its consolidated revenue and EBITDA. For example, the legal and regulatory frameworks can be opaque--Etisalat (along with several other foreign firms) decided to exit its Indian operations in 2012, after its license was revoked. The company also chose to exit the Nigerian market in 2017 after Emerging Markets Telecommunication Services Ltd. (EMTS) defaulted on a $1.2 billion loan because of the weakening Nigerian currency and foreign exchange controls. It had also proved difficult to ramp up operations and maintain market share in the competitive Nigerian market, where regulatory costs are volatile. In our view, Etisalat Group's acquisition of Maroc Telecom should help it to mitigate further regulatory risks in international markets by centralizing its oversight of its African portfolio and exploiting Maroc Telecom's expertise and operational experience on the continent. Like most GCC countries, the UAE government has banned VoIP services such as Skype for consumer customers, unless offered by the licensed operators through apps such as BOTIM and C'ME. The government is Etisalat Group's majority owner and the company benefits from this ban. We do not expect the UAE to liberalize such policies, but we could reassess our view if we see demand for a change. Etisalat continues to invest in its network, in line with the government's smart city initiatives and the race to launch 5G. Moreover, as part of its efforts to strengthen its defenses against cyberattacks, a common threat in the industry, Etisalat participates in the Global Telco Security alliance, alongside other major telecom providers, including Telefonica, Singtel, and AT&T. Although attempted cyberattacks increased by 56% year-on-year in 2018, to 167 million, Etisalat didn't experience any breach. Etisalat's main environmental consideration is its energy consumption, because it is exposed to high temperatures in the Gulf states. Although an increase in extreme weather could increase the cost of operating its network, energy costs in the GCC are heavily subsidized, and total network costs contribute only 10% of consolidated operational expenditure. Etisalat's energy-saving programs include efficient building management and solar power systems to reduce operational costs and its carbon footprint. The company is building a solar energy farm in 2020, which will generate about an estimated 64 gigawatt hours (GWh) of electrical energy a year. It also targets Leadership in Energy and Environmental Design (LEED) certified data centers to reduce energy consumption. Although the company has not yet publicly disclosed any carbon emission or energy consumption reduction targets, unlike many peers, it is working toward reducing its energy and water consumption. Empresa Nacional de Telecomunicaciones S.A. (Entel) (BBB-/Stable/--) Amalia E Bulacios Entel considers information security to be its key priority in terms of sustainability, for both the company and its stakeholders. We see Entel's ESG-related exposure as similar to the broader industry. Entel has had an ISO27001 certification for information security in its datacenter since 2010. In 2018, it appointed its first cybersecurity office and manager, to supplement its cybersecurity committee. The company has certain exposure to regulatory risks. For example, in June 2018, the Chilean telecom regulator froze the 3.5 GHz band, through which the company offers wireless 4G home internet, for about four months, to study future 5G developments. This prevented the company from offering the product during those months. That said, the impact was minor--wireless home internet represents less than 3% of the company's revenue. Energy consumption is the main environmental consideration for Entel. During 2018, an 101% increase in data traffic caused the company's energy consumption to increase 51% and its carbon dioxide emissions to rise 49%. The company does not have specific energy consumption targets, unlike many peers, but is committed using energy more efficiently and increasing the proportion of renewable energy it uses. It aims to ensure that its consumption consistently grows more slowly than its data traffic. Global Eagle Entertainment Inc. (CCC/Developing/--) Justin D Gerstley Global Eagle's past inability to properly integrate acquisitions and internal control deficiencies makes it more exposed to governance www.spglobal.com/ratingsdirect February 11, 2020 8
ESG Industry Report Card: Telecoms factors than its peers. The company is trying to remediate numerous deficiencies, which have resulted in delayed filings, elevated auditing expenses, heightened accounting costs, significant management turnover, and distraction. In our view, this has harmed the company's competitive position and liquidity profile. As a result, we lowered our rating on Global Eagle to 'CCC' in April 2019. Global Tel*Link Corp. (B/Stable/--) Justin D Gerstley Global Tel*Link is more exposed to social risks than telecom industry peers, because it is one of two rated companies that offer prison phone services, which have proved controversial. Advocacy and civil rights groups have drawn the media's attention to the high calling rates for inmates and the commissions that facilities receive from providers. We view Global Tel*Link's competitive position as weak because increased political pressure could increase regulation and prison reform could reduce the number of inmates. Under a different administration, the FCC could lower rate caps for interstate calls in future. That said, the FCC has no authority over intrastate calls, which represent the majority. Individual state and local governments would need to implement rate caps on these. Although such changes are unlikely to be instant, they represent a long-term threat to the company's business model, in our opinion. A more serious threat comes from the push for free calls for inmates, funded by local governments, which could negotiate lower rates. New York City and San Francisco have recently adopted this model. Grupo Televisa S.A.B. (BBB+/Stable/--) Humberto Patino We view Televisa as socially proactive, with ESG risk in line with the sector. It is committed to strengthening communities by promoting education and culture through Fundacion Televisa and other nonprofit organizations. Although Televisa is exposed to some environmental risks, these have little credit impact. The company has developed and implemented renewal energy products and energy efficiency programs, as well as initiatives to reduce water consumption and waste generation. About 35% of the water it uses is recycled. Governance is satisfactory. Televisa's very experienced management team has successfully diversified its revenue through its telecom segment, despite downward trends in the broadcast segment. Hong Kong Telecommunications (HKT) Ltd. (BBB/Negative/--) Hins Li HKT's exposure to environmental and social factors is comparable with that of its broader telecom sector peers. HKT is well aware of data privacy and security risks, which are vital for telecom operators. Measures taken to mitigate these risks include adopting ISO 27001-certified IT security management systems, establishing a groupwide cybersecurity resilience program, and deploying advanced security tools in the infrastructure. The company has reported no serious data breaches or violations of user privacy. HKT has maintained a track record of compliance and governance, despite its exposure to numerous regulations for telecommunication operators and listed companies in Hong Kong. This is partly attributable to its balanced board structure and stable management team. PCCW, HKT's major shareholder, is unlikely to intervene negatively, considering the terms and conditions of the trust deed. HKT's operations have not been affected by the recent social instability in Hong Kong. Despite sporadic and temporary closure of shops in protest areas, the company's telecom facilities and service provision remain intact. The company has not publicly disclosed any quantifiable carbon emission or energy consumption reduction targets, unlike many sector peers, though this hasn't meaningfully affected HKT's operations and financials for the time being. Hughes Satellite Systems Corp. (BB/Stable/--) Justin D Gerstley Hughes' controlling shareholder, Mr. Charlie Ergen, also holds a separate controlling ownership stake in Dish Network. This exposes both companies to greater governance risks than most telecom companies because he has shown that he could place his personal interests ahead of those of creditors. For example, Hughes recently sold satellite assets to DISH. The satellites had been leased by DISH to provide TV service to its customers under long-term contracts. The sale improved DISH's cash flow and financial flexibility, but caused the loss of about $275 million in predictable EBITDA for Hughes. Although Hughes gained an increased equity stake in DISH, creditors do not benefit from this. DISH needs at least $10 billion to build out its wireless network in the coming years. Hughes carries a large cash balance ($1.7 billion at June 30, 2019); we believe it is possible that Mr. Ergen could use Hughes as a strategic and financial partner to implement his vision for Dish's terrestrial wireless network. The risk that Mr. Ergen could engage in more credit-negative transactions is captured in our financial policy modifier and incorporated into our 4x downgrade trigger for the current rating (compared with current net leverage of less than 2x). We consider environmental and social factors to be in line with the broader telecom industry. Koninklijke KPN N.V. (BBB/Stable/A-2) Mark Habib KPN has had a carbon-neutral position since 2015, which compares favorably with peers. Its exposure to environmental and social risk factors is otherwise comparable with the broader telecom sector. Since 2011, KPN has sourced all of its power (85% of the company's energy use) from green production, compared with 52% for Deutsche Telekom, 58% for Telefonica, and 15% for Vodafone in 2018. It offsets the remaining 15% of its energy use, mainly vehicles and heating, with carbon credits, and plans to be carbon-neutral without offsets by 2030. Although increasing data traffic will also increase electricity use, we think KPN's plan to connect 40% of households with more efficient FTTH by the end of 2021 will help to control its own energy use. KPN's sustainability policy also considers its supply chain, where it targets a 50% cut in carbon dioxide emissions by 2040 (compared with a 2010 baseline). KT Corp. (A-/Stable/--) JunHong Park KT's exposure to ESG risk factors is comparable with that of the broader telecom sector. Although we factor social risks into our rating on KT, they have a limited financial impact and have not affected ratings to date. KT is managing privacy and data protection risk by building security control capabilities. It is also strengthening network safety management measures, mainly by securing emergency backup networks and stable power provision. A fire in late 2018 disrupted KT's network for a day in parts of the Seoul area and inconvenienced some of its telecom customers. Although we do not expect KT to suffer any material legal penalties owing to this incident, the company waived one month's bill for affected subscribers and compensated some small merchants for their business losses. This act of social www.spglobal.com/ratingsdirect February 11, 2020 9
ESG Industry Report Card: Telecoms responsibility somewhat reduced operating profitability, but the small scale limited the rating impact. Environmental risks include GHG emissions from data centers and office buildings, though we view this as on par with industry peers. KT has a long-term target to reduce GHG emissions by 35% by 2030 (compares with 2017). By 2018, KT had already reduced emissions by 13% compared with 2008 by using high-efficiency repeaters and integrated management of base stations. Liberty Cablevision of Puerto Rico LLC (B/Watch Pos/--) William Savage LCPR is more exposed to environmental factors than peers in the broader telecom universe because of its geographic concentration in a hurricane zone, which is factored into our business risk assessment. For example, in 2017 Hurricane Maria caused massive damage to critical infrastructure, leaving the island without power for an extended period. The company's network was not operational for two weeks. It took about a year to fully restore it, resulting in negative EBITDA for several quarters. Although the company has demonstrated resilience--internet subscribers are at close to pre-hurricane levels--the cost of insurance has increased significantly. This could cause greater financial harm if another hurricane of similar magnitude occurred. Liberty Global PLC (BB-/Stable/--) Osnat Jaeger Liberty Global's exposure to environmental and social risk factors, including data security, is comparable with the broader telecom sector. The chairman, Mr. John C. Malone, holds about 29% of the aggregate voting power, despite having an economic interest of less than 5%, through a mechanism of class A and class B ordinary shares with different voting rights. Although this structure is not itself detrimental to corporate governance, because Mr. Malone does not control the company, he is heavily involved in setting the group's strategy and financial policy. In general, any one-person concentration can be a risk. We do not consider environmental risks material to the rating. Liberty Global's energy exposure is significant due to growing data demand. Although services and data consumption grew by 17%, energy consumption fell by 1%. This is due to energy-efficiency projects and a switch to more green energy to power the network. Liberty Global has committed to reducing its scope 1 and 2 emissions by a minimum of 50% by 2030 and 80% by 2050 from their 2012 base year. MTN Group Ltd. (BB+/Negative/--) Omega M Collocott MTN is more exposed to governance factors than regional peers, despite a fair management and governance assessment. Underdeveloped and volatile legal and regulatory frameworks in the region introduce operating and financial uncertainties and litigation risk, particularly in Nigeria, which contributes about one-third of group EBITDA. MTN has sometimes found it hard to maintain good regulatory relationships in all its areas of operation, but addresses these risks by localizing ownership where appropriate, building on the group's expertise in developing markets, and increasing oversight capacity at local and head office levels. However, governance factors can still affect ratings. MTN's Nigerian operations were fined $5.2 billion in 2015 (later reduced to $1.6 billion) for late deactivation of unregistered SIM cards. In 2018, the Nigerian authorities alleged that MTN Nigeria had improperly repatriated $8.1 billion in dividends, and owed $2 billion in taxes. The Nigerian authorities acknowledged that MTN did not improperly repatriate dividends, but instructed MTN Nigeria to implement a notional reversal of its 2008 private placement of shares, at a cost which reduced MTN Nigeria's EBITDA margin by 1.6% in 2018. The tax matter was effectively resolved in January 2020. Regulatory relationships in South Africa are stable, but mobile and data price reduction policies, plus data protection and SIM registration requirements, put pressure on revenue and margin forecasts in our base case. Spectrum constraints, and delays in new spectrum allocation, are also driving up capex. Governance and social considerations tend to intersect in countries where fixed-line telephony is limited, and mobile services are often treated as a utility. MTN may experience societal and regulatory pressures to price voice and data services affordably, and provide networks in uneconomical, rural areas. MTN continues to invest in its networks, in line with regulatory and commercial initiatives, and has developed programs to improve access to its services for lower-income and rural customers. Environmental exposure is broadly in line with industry peers. Although the company joined the GSMA-led plan to achieve net-zero GHG emissions by 2050, it yet has to publicly disclose carbon emission or energy consumption reduction targets, like many of its peers. Nippon Telegraph & Telephone Corp. (AA-/Stable/A-1+) Hiroyuki Nishikawa We view NTT's level of ESG risk as broadly in line with telecom sector peers. Like its peers, NTT's access to confidential consumer data exposes it to social risk related to data security. The company has implemented various measures to protect data, and has reported no serious data breaches or violations of user privacy. Most of NTT's suppliers for telecom equipment are domestic companies with solid technological capabilities. Its equipment and network costs are relatively high, but it is free from regulatory bans. Unlike its Japanese peers, NTT has a responsibility to provide a universal fixed phone service across Japan, including less economic areas. That said, the effect on profitability is immaterial. NTT's energy consumption and utility costs are in line with global peers, in our view. Its energy-efficient FTTH network covers over 90% of Japan, partly mitigating the pressure of increasing data on energy costs. In addition to reducing its own carbon dioxide emissions, NTT has a target to contribute to reducing society's carbon dioxide emissions by at least 10 times the company's own emissions. For example, it could reduce traffic jams by analyzing traffic data, or reduce energy consumption in homes, or by companies and factories through energy management. Although NTT's communication infrastructure is exposed to natural disaster risk, such as earthquakes and typhoons, we believe the risk is manageable as the group has built durable network infrastructure and has a good track record of recovering the damage without losing its customers' confidence. Oi S.A. (B/Negative/--) Wendell Sacramoni In our view, poor governance was one of the major factors behind Oi's 2016 default. The company's sizable dividend payouts and acquisitions were inconsistent with its business performance and cash flow generation. Its capital structure became unsustainable. Governance improved significantly in 2018, after its judicial reorganization, in which its debt was restructured and it implemented a new corporate structure. Oi now has better defined business strategies and specific limits on remuneration payouts. These tend to maintain debt at the level defined in the judicial plan. Although we no longer regard governance as a major risk factor, we will monitor adherence to the targets. Environmental risks are low. However, Oi is less energy-efficient than Brazilian peers because it still uses copper networks www.spglobal.com/ratingsdirect February 11, 2020 10
ESG Industry Report Card: Telecoms
while its peers have invested more in fiber.
Ooredoo Q.P.S.C. (A-/Stable/A-2) Rawan Oueidat
Ooredoo's exposure to ESG risk factors is comparable with the broader telecom sector, with governance and environmental risks being the
most notable. The diplomatic spat between Qatar and other GCC countries has slightly deflated the already low level of roaming revenue
since it began in June 2017, but has not affected ratings, because roaming revenue is so small. The Qatari government, Ooredoo's majority
owner, blocks VoIP services such as Skype. Even though voice tariffs have been competitively priced, such restrictions limit over-the-top
competition. Ooredoo managed to maintain the high profitability margins of about 50% in Qatar that it achieved before the blockade, which
led to limitations on VoIP services. We do not expect Qatar to liberalize this policy, but could reassess our view if we see demand for a
change. The group's energy consumption is the main environmental consideration for Ooredoo because it is exposed to high temperatures
in the Gulf states. Although an increase in extreme weather could increase the energy required to operate its network, energy costs in the
GCC are heavily subsidized and contribute only 15% to operating expenditure. The company has not yet publicly disclosed any carbon
emission or energy consumption reduction targets, unlike many peers. That said, we understand that the company's mobile sites in Qatar
already run entirely on solar energy, and it plans to implement large-scale solar hybrid solutions, in addition to waste reduction projects.
Orange S.A. (BBB+/Stable/A-2) Mark Habib
Reputational and security risks are the most relevant ESG factors for our rating on Orange. It operates in many developing markets across
Africa and the Middle East, where regulatory systems are less predictable and operators subject to higher expectations regarding access
and inclusion needs. This exposes it to more reputational and community engagement risks. Orange actively mitigates this through
stakeholder engagement and multi-service platform development, and with economic and social development through its philanthropy
programs. Such initiatives can help by providing a more robust framework through which to promote awareness of such needs and address
them. Orange aims to reduce its 2025 carbon dioxide emissions by 30% compared to 2015, and to reach net carbon neutrality by 2040. Its
efforts to roll out FTTH could support such objectives; FTTH reduces energy consumption per gigabyte by up to 80% compared with copper
and cable technologies. Orange is second only to Telefonica in terms of FTTH coverage, among Europe's five largest markets. Orange's
exposure to ESG risk factors is comparable to the broader telecom sector.
Rogers Communications Inc. (BBB+/Stable/A-2) Aniki
Saha-Yannopoulos
Rogers' exposure to environmental and social risks is in line with that of peers. Risks include social risks related to data security, certain
government regulations, and social media activism. Specifically, its regulator, CRTC, recently ruled in favor of opening up the market to
third-party internet access (TPIA) providers and mobile virtual network operators (MVNO). Offering better access to rivals and cutting
wholesale costs could limit Roger's return on investments. We assess Rogers' management and governance as satisfactory, reflecting
positive scores for strategic positioning as well as management's operational effectiveness, experience, and depth. As do many of its peers,
Rogers has two classes of stock. The class A voting stock owned by the Rogers family provides full voting control, despite having an
approximate 27% economic interest. We do not view this structure as materially detrimental to corporate governance because we have not
seen any evidence of actions that would place the family's interests above that of the other shareholders. Even though environmental risk is
not an immediate concern, Rogers' goal for 2025 is to reduce its GHG emissions by 25% and energy use by 10%, based on 2011 levels.
Shaw Communications Inc. (BBB-/Positive/--) Aniki
Saha-Yannopoulos
Shaw is the second-largest cable and DTH satellite operator in Canada, exposing it to social risks concerning data security, government
regulations, and social media activism. Its main source of environmental risk is its large fleet of customer support vehicles. Neither social
nor environmental risks are unusual for the industry and the company has not yet publicly disclosed any carbon emission or energy
consumption reduction targets, unlike many peers. CRTC's recent ruling on TPIA providers and MVNOs, or Innovation, Science and Economic
Development Canada adopting policies that make the wireless spectrum less available, could limit Shaw's return on investments. We
assess Shaw's management and governance as satisfactory, reflecting good strategic planning and management's operational experience
and depth. Like many of its peers, Shaw has two classes of stock. The class A super voting stock owned by the Shaw family provides 79%
voting control, despite having an approximate 10% economic interest. We do not view this structure as materially detrimental to corporate
governance because we have not seen any evidence of actions that would place the family's interests above that of the other shareholders.
We view Shaw's exposure to environmental and social risks as being in line with that of the global telecom industry, and not material to the
rating.
Singapore Telecommunications Ltd. (Singtel) (A+/Negative/A-1) Yijing Ng
We see Singtel's exposure to ESG credit factors as similar to its peers overall, with key issues being data privacy and governmental pressure
to improve connectivity. Singtel manages customer privacy by investing in its security management systems and internal policies. It also
hosts a detailed general data protection regulation policy on its homepage. In 2017, a vendor accidentally leaked the personal details of one
Singtel customer; the vendor was fined for failing to protect the personal details of 2.78 million Singtel customers. Although Singtel was not
held liable for the data leakage, such events could affect its reputation. We assess Singtel's overall governance as strong, reflecting
management's vast experience in the industry. That said, we expect future fixed broadband profitability for Singtel's Optus business to take
a hit after moves by the Australian government to improve connectivity across the country. The government required home broadband users
to be migrated onto the National Broadband Network (NBN). Optus has rolled out a 5G fixed wireless network to offer an alternative
high-speed internet broadband solution at select locations, which tempers the impact of NBN migration, but at the cost of increased capex.
The company has high levels of transparency in terms of financial disclosure and timely communications with investors. Singtel's majority
owner is the Singapore government, through Temasek; the company maintains a close link with its majority owner.
www.spglobal.com/ratingsdirect February 11, 2020 11You can also read
