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 importance because of the rapid growth of data traffic. Green bond issuance and other ADDITIONAL CONTACT 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 1 ESG 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