- Moody's Investor Service is developing a carbon transition assessment (CTA) for public, non-financial companies, a recognition of the "risks and opportunities" businesses may face as they look to access capital.
- Moody's has requested feedback on the idea and opened a 60-day comment period on a proposed scoring framework of a company's carbon transition risk, which includes the need to comply with regulations aimed at greenhouse gas reductions and the cost required to decarbonize energy sources.
- There is a growing acknowledgement of the risks corporations with carbon and climate exposure may face, which has spurred increasing clean energy purchases. Last year, corporations around the world signed deals for 13.4 GW of clean energy — more than doubling 2017's record amount of 6.1 GW.
Moody's already assesses the carbon risks faced by public companies, but says the new initiative is aimed at transparency.
The proposed CTAs "are intended to provide market participants with a greater level of visibility and transparency into how Moody's assesses carbon transition risk, and to provide a relative ranking of issuers operating within selected sectors identified under the framework," the firm said in a statement.
The CTAs will also serve as a research tool for "systematic analysis of carbon transition and its potential to influence credit risk." However, the firm stressed the new ratings are not credit ratings.
"The transition to a low-carbon economy brings risks and opportunities that are material to credit in some sectors," James Leaton, a vice president and senior credit officer at Moody's, said in a statement. He said the new assessments will provide a "standardized approach to analyzing carbon transition risk."
Moody's said the assessments will include a materiality assessment, a geographic mapping of technology, market and policy risks, and an assessment of risk mitigation measures. Four components will make up the CTA, ultimately resulting in a score expressed on a 10-point scale. Moody's said the components include:
- the company's current carbon profile;
- exposure to technology risk in the medium-term;
- mitigation strategies in the near- to medium-term; and
- long-term exposure to rapid low-carbon transition scenarios.
The lower scores, CT-1 for instance, would represent companies in "advanced positioning for carbon transition." A score of CT-10 would indicate "poor positioning" for carbon transition, the firm said.
After receiving comments, Moody's said it intends to publish a final report on the CTA framework and will subsequently publish sector-specific frameworks for 15 sectors the agency identified as having "very high or high exposure" to carbon transition risk.