Ratings agency Moody’s to look at climate risks faced by sovereign issuers

Ratings agency Moody’s says it is planning to look at countries’ exposure to climate change and carbon transition risks.

It comes as it said it plans to use a central scenario based on countries’ national commitments under the Paris Agreement to assess the credit implications of carbon transition risk.

“The near universal adoption of the Paris Agreement substantially increases the likelihood of coordinated and effective policies to materially reduce carbon and other greenhouse gas emissions over time, which has in turn the potential to become a significant ratings driver in a broad set of industries,” said Brian Cahill, a Moody’s Managing Director and Head of the Corporate Finance Group and Public, Project and Infrastructure Finance team in Asia Pacific.

“Our baseline scenario is a forecast of the global emissions pathway if all countries were to implement their national contributions put forward as part of the Paris Agreement,” added Senior Vice President Ilya Serov. The national contributions are the voluntary Intended Nationally Determined Contributions, or INDCs, a key feature of the accord at the end of last year.

Moody’s has issued a report for its subscribers called Environmental Risks: Moody’s To Analyse Carbon Transition Risk Based On Emissions Reduction Scenario Consistent with Paris Agreement.

Moody’s adds that it also considers the credit implications of direct climate change hazards, including environmental risks induced by a possibly slower pace in the reduction of greenhouse gas transmissions.

“However, based on the current limited visibility into the nature, probability and severity of the follow-on risks to global warming trends, and the extremely long projected time frame, direct climate change hazards are not at present a material driver for most ratings.”But, crucially, it went on to reveal that it will start to look at sovereign climate risks, saying: “Moody’s plans to address the risks of climate change and carbon transition faced by sovereign and sub-sovereign issuers in a separate publication.” There was no further detail about how this would be taken forward.

“Moody’s plans to address the risks of climate change faced by sovereign issuers”

Moody’s has identified four primary categories of risk associated with carbon transition that it will use to assess the credit implications for corporate and infrastructure sectors:

1) Policy and regulatory uncertainty about the pace and detail of emissions policies

2) Direct financial effects due to higher research and development costs, capital expenditure and operating costs

3) Demand substitution and changes in consumer preferences

4) Technology developments and disruptions

Environmental risks and sovereign credit ratings are already been scrutinized by the ERISC project, short for Environmental Risk Integration in Sovereign Credit Analysis. Last month it unveiled its Phase II report, which found that higher and more volatile food prices are “key transmission mechanisms” through which environmental risks and constraints such as climate change, ecosystem degradation and water scarcity will impact national economies and potentially credit ratings.