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Announcement:

Moody's: FSB task force could start to enhance clarity on climate risk disclosures

Global Credit Research - 14 Apr 2016

New York, April 14, 2016 -- Moody's Investors Service says that the first report issued by the Financial Stability Board's Task Force on Climate-Related Financial Disclosures (TCFD) could both help raise the level of clarity on climate risk disclosures by issuers and advance credit analysis in this area.

"The report enumerates a set of fundamental principles of disclosure, which -- combined with a standardized and consistent scenario analysis framework for disclosing climate-related risks, by region, industry and time horizons -- could serve as a meaningful starting point for integrating more methodically climate change into our analysis of creditworthiness," says Henry Shilling, a Moody's Senior Vice President.

Moody's conclusions were contained in its just-released report, "Environmental Risks and Developments - FSB Task Force Could Begin to Clear Fog on Climate Risk Disclosures."

The "Phase I" report from the TCFD -- released on 1 April -- represents the culmination of its scoping and analytic work so far in 2016 on the question of how the financial sector can better incorporate climate-related issues and opportunities into decision-making by companies, insurers, investors, and other important actors in the financial system.

In general, Moody's believes that financial reporting, including voluntary reporting, is the fundamental tool upon which, investment, credit, and similar decisions are made. As a result, usefulness in the decision-making process must be the yardstick by which all disclosures, not just climate related disclosures, should be judged.

Moody's notes that the FSB -- towards the goal of promoting meaningful decision-making disclosures related to climate risk -- has identified seven fundamental principles that are critical for an effective climate-related disclosure regime, specifically:

1. Present relevant information

2. Be specific and complete

3. Be clear, balanced, and understandable

4. Be consistent over time

5. Be comparable among companies within a sector, industry, or portfolio

6. Be reliable, verifiable, and objective

7. Be provided on a timely basis

As these FASB principles have also been used for many decades, Moody's considers them an excellent starting point to enhance useful climate-related disclosures for decision making. And while no disclosure system will ever be perfect, Moody's believes that if the FSB's concepts are widely adopted, they will enhance climate-related credit risk analysis.

More generally, understanding and integrating the potential consequences of climate change into creditworthiness is extremely challenging because climate impacts -- including efforts to adapt to and mitigate climate change -- will depend on a multitude of contributing factors that interact in complicated ways and that are characterized by varying degrees of uncertainty.

However, Moody's expects that improvements in high-quality relevant climate statistics will improve, while the ongoing research and advancement of climate science will likely provide increasing levels of confidence about climate change and its effects across regions.

In the meantime, a standardized and consistent scenario analysis framework for disclosing climate-related risks, which will vary by region, industry and time horizons -- including short, intermediate and long-term time intervals -- that embody the above principles could serve as a meaningful starting point for more effectively engaging with affected entities and systematically extending our capacity to gauge the impact of climate change on the relative rankings of the credit profiles of issuers.

Generally the types of environmental related disclosures that will aid the quality of our credit assessment would include both qualitative and quantitative measures of current and expected environmental related risks and how those risks affect an entity's operating environment, institutional capacity, financial position and performance, leverage and debt coverage, all of which are assumed to be predictive for the likelihood of default and expected loss.

In particular, Moody's believes that enhancing climate-related disclosures along these lines would be especially valuable and instructive when assessing companies in the 11 sectors that we have identified as either already exhibiting elevated credit exposure to environmental risks; or will do so over the next 3-5 years, both in terms of materiality and timing, largely due to environmental policies aimed at reducing CO2 levels. These sectors together represent $2 trillion in rated debt.

Subscribers can access the full Moody's report at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1022814

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Henry Shilling
Senior Vice President
Env Social & Goverance
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Anne Van Praagh
MD - Sovereign Risk
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: FSB task force could start to enhance clarity on climate risk disclosures
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