Sectors with $1.1 Trillion Debt Have High Exposure to Both Climate and Natural Capital Risks: Moody’s
Five sectors with more than $1 trillion in rated debt face high exposure to both physical climate and natural capital risk, while a lack of disclosure standards for reporting on these issues creates challenges in financing measures to address these risks, according to a new report from Moody’s Investors Service.
Physical climate risks can result from several factors such as exposure of assets to climate events including heat stress, floods or hurricanes, while natural capital can arise dependence on goods and services derived from nature that become depleted. Additionally, as governments, regulators, investors and other stakeholders increasingly focus on addressing environmental sustainability, businesses face additional risks ranging from compliance costs and litigation to investor scrutiny and changing consumer preferences.
The report highlighted the close connection between physical climate and natural capital factors, and particularly how impacts in these areas can exacerbate each other – such as deforestation leading to higher greenhouse gas (GHG) emissions, which in turn leads to climate events that further deplete natural resources – while also noting the close interrelation of these risks for debt issuers, with many sectors and regions often exposed to both.
Report author Lucia Lopez, Vice President Senior Credit Officer at Moody’s Investors Service, said:
“The interplay of ecosystem vulnerabilities, such as biodiversity loss and physical climate risk, is increasingly drawing the attention of investors and policymakers. While each on its own can pose credit risks for issuers, natural capital and physical climate considerations are also closely interrelated, as illustrated by the number of sectors and regions that have high or very high inherent exposure to both.”
In the report, Moody’s identified five sectors with a combined $1.1 trillion in rated debt assessed as having high or very high exposure to both physical climate and natural capital risks, including mining, coal mining & coal terminals, integrated oil and gas, protein and agriculture, and environmental services and waste management. Risks included reclamation and rehabilitation costs for mining companies, abandonment liabilities due to physical damage to ecosystems for oil and gas companies to disrupted operations from extreme weather events for agriculture and protein companies with fixed operating assets in vulnerable locations.
Within these sectors, Moody’s found that 40% of issuers have highly negative exposure to both risks. Additionally, three of the sectors – coal, oil and gas, and protein and agriculture – also have been assessed as having high exposure to carbon transition risks.
The report also highlighted the risks for sovereign issuers from physical climate and nature related factors, noting in particular that countries with high exposure to these risks are often those with lower income levels and weaker balance sheets, limiting their ability to address these risks.
To date, the report noted, most environmentally-focused disclosure efforts have emphasized climate transition-related issues such as GHG emissions, although detailed disclosure requirements for physical climate and nature related risks may soon increase, resulting in improved ability to assess comparability of risk exposures, and to highlight possible areas for mitigation and adaptation needs. For example, both the SEC and the ISSB have proposed reporting rules, expected to be released this year requiring disclosure on physical climate risks, and the Taskforce on Nature-related Financial Disclosures (TNFD) is in the process of developing a framework for reporting on nature-related risks.
The absence of standardized disclosures, however, creates challenges for entities looking to finance measures to address and mitigate these risks. Moody’s noted, for example, that the significant majority, roughly 80%, of green bond proceeds in 2022 were channeled to climate change mitigation categories including renewable energy, clean transportation, green buildings and energy efficiency, while less than 20% were used to fund climate adaptation and nature-related projects, as it is difficult to find projects at scale in these areas.