Most Frequently Identified Environmental Risks
Moody’s looked at the environmental risks in 86 sectors representing $68 trillion of debt
Sustainability is a top concern for many corporations, investors, employees and customers. And that makes it a top concern for Moody’s as a company of credit and enterprise risk analysts and as a corporate citizen of the world.
The reality is, though, that the three facets of sustainability — environmental, social and governance, or ESG — aren’t new to Moody’s at all. Our analysts have always looked at all relevant risks to a sector or individual company.
What’s different today is that there is more focus on environmental, social and governance standards and increasing concerns about environmental risks. There is also more interest in how ESG factors affect creditworthiness. In response, Moody’s Investors Service launched the ESG Initiative to give the global financial community a thorough look at how ESG factors impact financial markets.
One of the hottest topics today is climate change. There is a growing body of scientific evidence linking carbon emissions and global warming. To avoid disaster, scientists say that we must transition to a low-carbon economy. The Paris Agreement from December 2015, in which 195 countries agreed to a global action plan intended to limit global warming to well below 2°C, is expected to result in more rules and regulations aimed at reducing greenhouse gas emissions (GHG). For corporations, that means increasing pressure to disclose their climate-related risks and how they are mitigating them.
What does that mean for Moody’s? Institutional investors want to know how ESG factors, including climate-related risks, are being considered in a company’s credit rating. Moody’s has responded by publicly addressing the relationship between creditworthiness and climate-related risks.
Why do investors care about climate change? Because in a low-carbon, sustainable energy world, not all companies will be able to adapt. Moody’s takes a macro and micro look at the issue. Sector research identifies the challenges inherent to an industry; credit ratings examine how an individual company’s response to those challenges affects its ability to repay its debt.
For example, in the coal sector, a company with a solid strategy to diversify into alterative energy might have a different credit rating than one without such a strategy.
Most of the 86 sectors scored consistently low across the five subcategories of environmental risk: air pollution; soil/water pollution and land use restrictions; carbon regulations; water shortages; and natural and man-made disasters. Carbon regulations and air pollution were the most frequently cited risks in sectors with higher risk overall.
Because of its expertise in evaluating creditworthiness, Moody’s was invited to join the Task Force on Climate-Related Financial Disclosures, a group organized by the Financial Stability Board, an international body that monitors the global financial system. The task force is a multinational effort to set standards to help lenders, insurers, investors and regulators make better decisions.
The international task force, led by entrepreneur and philanthropist Michael Bloomberg, issued its recommendations for public comment in December 2016. See the task force’s report »
In 2016, MIS introduced its Green Bond Assessment, which provides a consistent, standardized and transparent way to evaluate a Green Bond on its ability to deliver on its environmental promise.
A Green Bond is a fixed-income security that funds projects with specific climate or environmental sustainability purposes. Other than that, it is like any other bond. The credit rating for a Green Bond is determined in the same way as one meant for another purpose, while the Green Bond Assessment is a separate service that measures factors that are different altogether.
Bonds are assessed from GB1 — excellent — to GB5 — poor. The Green Bond Assessment reflects Moody’s opinion on five broad factors, including use of proceeds, ongoing reporting, organization, management of proceeds and disclosure on use of proceeds.
The City of Gothenburg, Sweden, has been issuing Green Bonds since 2013. In 2016 Moody’s, which already performs credit ratings for the city, approached Magnus about having the city’s next Green Bond assessed.
Moody’s Corporation is committed to doing our part to protect and care for the environments in which we live and work, including compliance with the letter and spirit of all relevant environmental legislation.
Our commitment is demonstrated by the continuous development and implementation of practical and effective corporate policies and programs that support the more efficient use of natural resources and reduce the impact of our businesses on the environment. Some of our practices include:
Several environmental impact considerations guide our process for selecting and designing our physical office locations, including: availability of public transportation; LEED certification (or local equivalent); and use of energy efficient, recycled and sustainable materials, fixtures and control systems.
We follow a number of processes to minimize the environmental impact associated with maintaining our facilities. For example, we comply with local and landlord-driven recycling programs, recycle kitchen grease and compost wet trash in food service locations. We use eco-friendly cleaning products and maintain our equipment and infrastructure to ensure ongoing efficiency.
Our procurement decisions are guided by environmental factors, including purchasing energy efficient products, encouraging the use of products made from recycled materials and including environmental impact in our evaluation of procurement alternatives for services, manufacturing, travel and other products.
We’ve previously picked the low-hanging fruit in our own sustainability efforts. Recycling? Check. LED bulbs? Check. Motion-sensors on lights? Check. We’ve even checked the boxes on some less common conservation efforts such as composting food waste and recycling coffee packets from our pantries. And we are proud of the fact that 57% of our global square footage is LEED certified.
Now we are tackling some of the trickier items, like measuring our carbon footprint. We are working with our property owners and outside consultants to gain greater understanding of our impact. Our property owners, particularly in New York, have begun supplying us with energy, water and emissions data. We’ve discovered that our consumption of electricity at our 7 World Trade Center headquarters was down in 2016 from 2015, to 7.13 million KwH from 7.33 million KwH. Energy consumption from gas was also down, from 995,637 megajoules to 964,057 megajoules. With this knowledge comes the power to track and reduce our footprint.
We also encourage our employees to make use of our new video conferencing system as an alternative to travel. In 2016 we reduced our carbon emissions by 4,085 metric tons CO2e over 2015 by traveling fewer miles by air or rail.
