Moody’s seeks market feedback on carbon transition risk tool

Moody’s, the credit ratings agency which recently closed a €50m takeover of ESG research house Vigeo Eiris, is seeking market feedback on a proposed framework for carbon transition assessments (CTAs) of non-financial companies operating in sectors deemed as having “high” or “very high” transition risk.

Carbon transition risk is described as “the implications of the policy, legal, technology and market changes likely to be associated with a transition to a lower-carbon economy”. An oil producer, for example, may face the risk of higher taxes, competition from renewable energy providers and mounting consumer action to reduce exploration and extraction activities.

Crucially, Moody’s framework will also recognise companies that are well-positioned to capitalise from the carbon transition, such as producers of renewable energy.

The point person for the initiative is James Leaton, the former Research Director at Carbon Tracker who joined Moody’s last year.

CTAs are scored on a 10-point scale. Issuers with the highest scores demonstrate “advanced positioning”, while the lower scores indicate “poor positioning” and business models which are “fundamentally threatened” by the carbon transition.

Companies will be assessed relative to their sector by way of a sector-specific scorecard – Moody’s have included a scorecard for the global automobile industry as an example for feedback alongside the framework.

While CTAs are not considered as having any direct impact on credit ratings, the assessment will be available to Moody’s clients as a supplement to credit assessments – to provide a more comprehensive measure of credit quality.The framework will make use of third-party data sources to augment company disclosures. Assessments of carmakers, for example, incorporate data from providers such as Bloomberg New Energy Finance and industry data group Wards.

Moody’s proposed CTA framework is underpinned by the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) – Moody’s is a member – which include assessing a company’s resilience against a number of climate warming scenarios. To this end, the framework assumes a rapid carbon transition in line with the Paris-agreed goal of limiting global temperature rise to under 2 degrees.

Sector-specific CTAs are the culmination of an exercise to identify sectors with significant exposure to carbon transition risk which Moody’s began in 2015. Subsequently, 11 sectors were identified including coal mining, shipping, building materials and steel.

While the framework is aimed at companies operating in these high-risk sectors, Moody’s say that financial institutions will be able to gauge their carbon transition risk as part of broader credit assessments.

Moody’s did not tap into the capabilities of Vigeo Eiris during the development of the framework due to the long-standing nature of the project.

The request for feedback comes after a recent flurry of activity among credit ratings agencies (CRAs) to prioritise ESG-related risks.

S&P is developing a standalone ESG assessment for issuers which will assess climate disclosures against the TCFD recommendations, while Moody’s itself has published its methodology for assessing ESG risks in credit analysis. Fitch has published an opinion on the “relevance” of various ESG issues on credit scores and signed up to the PRI last year.

Respondents are invited to submit their feedback by July 6.