News Risk Management03 Oct 2018

Regulatory pressures mean credit exposure risks for industries facing carbon transition-Moody's

03 Oct 2018

Eleven sectors with $2.2tn in rated debt have elevated credit exposure to environmental risks. In particular, carbon transition risk is a significant credit consideration for 10 of these elevated risk sectors exposed to carbon regulation, said a report from Moody's Investors Service.

Moody's report, "Environmental Risks -- Global: Heat map: 11 sectors with $2.2tn debt have elevated environmental risk exposure", found that as governments seek to fulfill their Paris Agreement commitments, the tightening of regulatory regimes governing CO2 emissions is having a tangible -- and, in some cases, disruptive -- impact on the most exposed industrial sectors globally, said Moody’s.

The two sectors facing the most immediate risk are unregulated utilities and power companies, and coal mining and coal terminals, accounting for a collective $517bn of rated debt.

For the remaining nine sectors – automotive manufacturers, building materials, commodity chemicals, mining, oil and gas exploration and production, oil and gas refining and marketing, steel, and the new additions of shipping, and transportation and logistics – exposure to environmental risks could be material to credit quality within three to five years. These sectors account for rated debt of $1.7tn.

"Unregulated utilities and power companies are directly exposed to policy pressure to cut emissions, and this will continue to disrupt business models and pressure margins in mature economies," said Moody's senior vice president Rahul Ghosh.

"For the coal sector, environmental considerations have constrained credit quality by reducing demand for the commodity, although the degree of impact varies by region and type of coal."

An additional 22 sectors with $10.1tn in rated debt have moderate credit exposure to environmental risks.

For these sectors, there is less certainty that environmental risks will develop in a way that is material to credit quality for most issuers in the sector, or there is a longer runway for issuers to adapt to substantially mitigate the overall credit impact. Half of the debt in this sector relates to developing economy sovereigns, such as small, agricultural dependent sovereigns, vulnerable to the impact of climate change.

Finally, 51 sectors with $62.3tn in rated debt have low exposure, meaning environmental risks are unlikely to generate material credit consequences.

The report, which is an update to an original Moody’s 2015 study, dissects the exposure of 84 industry sectors covering $74.6tn of debt.

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