Moody’s Heatmap Shows Heightened Environmental Credit Risk

Moody’s analysts have revised their environmental classification to reflect evolving environmental, social and governance standards, disclosure frameworks and market conventions among issuers and investors.

Environmental risks can arise from regulatory and policy issues, hazards or a combination of both. The five environmental categories Moody’s considers most material to credit are

• carbon transition,
• physical climate risks,
• water management,
• waste and pollution and
• natural capital.

Moody’s identified these categories, which apply to both public and privatesector issuers, based on their alignment with evolving market standards and conventions.

These changes represent a reclassification and/or renaming of Moody’s previous environmental categories. The previous environmental categories were featured in an earlier, 2018 environmental heat map report. The analysts underline that it is not a change in the specific environmental issues being considered. It is important to understand that rating changes can result from changed criteria, models and weightings as well as from changed framework conditions and new data from the organizations to be assessed.

Each of the five categories has been cited as a material consideration in their rating actions. Environmental considerations are becoming more relevant to the credit quality of Moody’s rated issuers. Moody’s points out that environmental credit risk will continue to grow.

In their “sector in-depth” report “Heat map: Sectors with $3.4 trillion in debt face heightened environmental credit risk” Moody’s identifies sixteen sectors with $4.5 trillion in rated debt having very high or high inherent exposure to carbon transition risk. Eighteen sectors with $7.2 trillion of debt have high inherent exposure to physical climate risks and again eighteen sectors with $5.2 trillion in rated debt have very high or high inherent exposure to waste and pollution risk.

Eight sectors with $747 billion in debt face heightened inherent exposure to natural capital risk. Six sectors with $925 billion in debt have very high or high inherent exposure to water management risk, according to Moody’s.

ESG – Global: Heat map: Sectors with $3.4 trillion in debt face heightened environmental credit risk (53 pages).