The credit implications of net zero initiatives in 2022 could lead to financial strain on carbon-intensive businesses or those who don’t have strong sustainability goals by potentially limiting funding available from capital markets, according to Moody’s.
Investors will also focus more on natural capital and biodiversity, which have not previously been considered as a priority by financial markets, according to the 2022 ESG Outlook by Moody’s.
Moody’s says commitments made at last year’s COP26 made progress, but still haven’t gone far enough to make a correct impact. It says the climate risk is high across multiple industries and that is making investors mindful of physical climate implications.
Programs like the Glasgow Financial Alliance for Net Zero (GFANZ) could especially highlight implications on organizations. If members of GFANZ follow through on their commitments, Moody’s says, it could put pressure on companies that don’t make similar commitments.
Moody’s says the private sector will face more pressure to transition to a green economy. That will be driven by government regulations, improved disclosure policies, advanced technology and the financial sector’s decarbonization commitments.
An example is the United States’ $1 trillion infrastructure bill that includes integration of renewable energy resources, which has created a positive credit scenario for utilities and electric companies, according to Moody’s. Automakers on the other hand, face more risk, but with improvements such as increased electric vehicle production the industry has made progress in the area.
Shifts in a focus on emissions impacts could be significant, as Moody’s estimated last year that G20 financial institutions had nearly $22 trillion tied to carbon-intensive industries.
Natural capital, which has been slow to match other sustainability incentives such as carbon pricing, will also become more of a focus this year, according to the outlook.
The final biodiversity framework is expected this year from the Convention on Biological Diversity, which will layout a recovery plan by 2030. Additionally, the Taskforce on Nature-related Financial Disclosures (TNFD), which aims to publish a framework for disclosures on nature-related risk by 2023, is likely to produce more consistent guidelines of nature-related risks in financial assessment, Moody’s says.
About a quarter of the world’s emissions comes from natural areas and deforestation, according to the United Nations, and nature-based investment needs to triple by 2030 if emissions targets are to be met.
There have been 141 countries making up around 90% of the world’s forests that have pledged to stop and reverse deforestation by 2030. Twenty-eight more countries have pledged to remove deforestation from food and agriculture industries and more than 30 financial institutions have pledged to eliminate agricultural commodity-driven deforestation from their investments by 2025.
Moody’s says it expects investors to focus more on the carbon impacts of land use moving forward.
“As awareness grows of the potential consequences of global warming – and the limitations of countries’ decarbonization commitments at COP26 – investors are likely to become more mindful of the financial impacts of physical climate risk,” says Lucia Lopez, vice president – senior credit officer at Moody’s Investors Service and lead author of the report.