Moody’s: Environmental risk threatens $2 trillion in rated debt

December 23, 2015

While the credit of coal and power industries is often thought to be the most vulnerable to environmental risks, new research from Moody's Investor Service finds they are just two of 11 sectors whose credit could suffer due to environmental changes in the next five years. The rated debt for these industries, which include automobiles, oil and gas, mining, steel and commodity chemicals, totals about $2 trillion, according to Moody's.

While not under immediate threat, Moody's found an additional 18 industries could see their total rated debt of $7 trillion jeopardized by environmental risks in five or more years. This category, which includes sovereign and regional governments in developing economies, integrated oil and gas companies and regulated power generation utilities, have a clear exposure to environmental issues that could deliver a hit to their credit quality. However, with more time to respond to these exposures, these industries may have a chance to mitigate their risks if they are able to implement policy changes, develop low-cost solutions or otherwise adjust their business models.

At the bottom of the list, Moody's reports an additional 57 sectors – including telecommunications, banking and insurance – representing $59 trillion of rated debt, to be at low risk. The study found that environmental risks in these industries are unlikely to have a material impact on credit quality. For some sectors, this is simply due to low risk, while business diversity protects others' credit.

Moody's, one of the "Big Three" global credit rating agencies, published these findings in a heat map that qualitatively scores the relative environmental risk of 86 unique industries around the world.

To assess the potential impact environmental risks could have on businesses' future credit ratings, Moody's identifies two broad categories: direct environmental hazards and consequences of regulatory or policy initiatives that seek to reduce those hazards. Examples of direct hazards on the Moody's scale include pollution, drought and severe natural and man-made disasters, while policies to reduce carbon emissions serve as secondary threats.

To reduce the impact these environmental risks can have on their credit ratings, businesses can work with environmental consultants to conduct site assessments and develop site-specific corrective action limits. By gaining regulatory agency approval of higher corrective action limits based on site-specific risk factors, environmental companies like PPM can help businesses protect their investments while collecting significant savings on their remediation costs.