MOODY'S Investors Service said that the credit impact from environmental issues varies widely across the sectors that it rates, both in terms of materiality and timing. Moody's conclusions are contained in two new reports, titled "Cross Sector — Global: Moody's Approach to Assessing the Credit Impacts of Environmental Risks" and "Environmental Risks: Heat Map Shows Wide Variations in Credit Impact Across Sectors". Both reports are authored by Brian Cahill, a managing director; William Hunter, a senior vice president, and other senior Moody's analysts. In its approach to assessing the credit impact of environmental issues, Moody's identifies two broad categories: (1) direct environmental hazards, such as pollution, drought and severe natural and man-made disasters; and (2) consequences of regulatory or policy initiatives that seek to reduce those hazards, such as policies to reduce carbon emissions. Moody's further refines these categories in order to form a view on the timing and certainty of their impact on an issuer's credit profile: Regulations that were recently implemented or are likely to be introduced have the greatest potential to change the credit profiles of issuers and sectors. Longer-term regulatory initiatives where implementation is unclear or subject to delays or meaningful regional variations provide less visibility into the discernible impacts on the relative credit risk of issuers. Lack of clarity may also diminish issuers' ability to adapt to regulations. Direct hazards, other than episodic, high-severity events such as major oil spills, are typically incremental, developing over very long timeframes, with diffuse consequences and limited impact on ratings. Of the 86 global sectors that Moody's has qualitatively scored for exposure to environmental issues that may have a credit implication, a total of 11 — with approximately $2 trillion of rated debt — are experiencing material credit impacts or are likely to start doing so over the next three to five years. For these 11 sectors, the consequence of regulatory or policy initiatives for carbon reduction and other air emissions is the most frequently cited issue impacting creditworthiness. A further 18 sectors — with approximately $7 trillion of rated debt — face the potential of changes in their credit profiles that could be material due to environmental considerations, but over a longer period of 5 years or more. "Specifically, Moody's views unregulated power generation, coal mining and coal terminals as most immediately exposed to a material impact on their credit profiles because of environmental issues, with certain other sectors — such as oil & gas exploration and production companies and automobile manufacturers — exposed to issues that could be material to their credit profiles over the next three to five years," said Cahill. "However, business, economic and financial factors as well as technological solutions are expected to mitigate some of these risks, especially for businesses and institutions that have longer time frames to adapt and that also possess inherent credit strengths," said Cahill. "Importantly, Moody's notes that 57 sectors — with approximately $59 trillion of rated debt — are considered as having low credit risk to environmental considerations and are unlikely to see such issues materially impact credit quality," added Hunter. Some sectors that Moody's considers as having low credit risk to environmental issues benefit from mitigating factors that limit the credit impact such as economic, policy or financial flexibility. In assessing the credit impact of environmental issues, Moody's incorporates them alongside other relevant long- and short-term risks, with the most forward-looking view that visibility into these risks permits. In most cases, nearer-term risks are more meaningful to issuer credit profiles and thus have a more direct impact on ratings. As the time frame for a risk or event lengthens into the future, its likelihood, impact and relative importance become less predictable. Longer timeframes give issuers greater capacity to adapt and to align their operations and balance sheets to changed circumstances, while increasing the likelihood that technology will drive lower
