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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
"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,
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,
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
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Senior Vice President
Env Social & Goverance
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Anne Van Praagh
MD - Sovereign Risk
Public Finance Group
Moody's: FSB task force could start to enhance clarity on climate risk disclosures
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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