Coal among $2 trillion debt rated at high and immediate environmental risk

The Bottom Line

The voice of leading businesses and investors at COP21

Coal among $2 trillion debt rated at high and immediate environmental risk

Moodys has published two reports detailing how environmental risks influence sectoral credit ratings. Developing and applying its own approach, the ratings agency found sectors representing $2 trillion of rated debt to be facing the greatest credit exposure. Present within this group were coal industries as well as unregulated power and utilities.

Brian Cahill, Managing Director (Asia Pacific Corporates & Financial Institutions Group) at Moodys, talked The Bottom Line through the findings. “Investors are increasingly asking us to provide our opinion on how to assess the credit implications of environmental issues for the sectors they have lent to.

“We have qualitatively scored 86 sectors globally, with approximately US$67.9 Trillion of rated debt, for their credit exposure to environmental risks. We believe this gives investors a transparent assessment of our opinions on this and a way to engage further with us on the topic if they want to.”

Environmental risks differ in influence upon credit exposure. Moodys classified them into three categories based on timing and levels of certainty. “Regulations that were recently implemented or are likely to be introduced have the greatest potential to change credit profiles. Longer-term regulatory initiatives where implementation is unclear or subject to delays or meaningful regional variations provide less visibility into the discernible impacts on the relative credit risk. Finally direct environmental hazards, other than episodic, high-severity events, such as major oil spills, are typically incremental, developing over very long time frames, with diffuse consequences and limited impact on ratings.”

The strength of influence coming from current or imminent regulation is evident when sectors are looked at individually. Cahill outlined these implications for coal. “Although not the most immediate driver of rating downgrades in the coal sector, environmental concerns are reducing demand for coal and diminishing the expectation that the current pricing trough for coal will reverse in the foreseeable future.”

Cahill noted a number of ways sectors could score more resiliently. “Some may benefit from government policies. Others have the business or financial flexibility that will allow them to adapt as the risks develop. And then there are sectors that simply have a low exposure, for example, media or telecoms.”

At this pivotal moment in climate negotiations, the monitoring of credit exposure to environmental risks is more important than ever. “A material challenge for everyone is the uncertainty around the pace and magnitude of global carbon emission reduction policies. However, we have identified the sectors most exposed in our recent research and are very focussed on assessing the implications of the agreement that comes out of COP21.”

Edition 11 December 11, 2015

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