Cutting carbon creates risks while creating opportunities

Moody’s Investors Service says that the impact of carbon reduction policies is rising globally, creating credit risks in carbon-intensive industries but at the same time, driving innovation and change across many industrial sectors.

“An increase in ‘direct carbon liabilities’, such as carbon permits and/or carbon taxes, as well as the emergence of disruptive technologies, such as solar power, are already having a tangible impact on rated companies in select carbon-intensive industries,” says Brian Cahill, managing director for Moody’s Fundamental Group in Asia Pacific.

“But such policy action is also driving innovation and change across many industrial sectors; for example, technological innovation is very advanced in power generation where renewable energy, especially in parts of Europe, is established,” says Raffaella Altamura, a vice president and senior analyst based in Moody’s corporate finance group in Europe.

Furthermore, even the most affected sectors enjoy some mitigating factors, says the Moody’s report.

For example, in the power generation sector, regulated utilities are likely to experience some protection through adjustments to regulation, and thermal coal producers will continue to enjoy the growth of demand in emerging markets, especially China and India.

In the automotive industry, nearly all global players have established electric or hybrid car offerings, as they position themselves for possible long-term changes in end-user demand.

In addition, many of the players in sectors that are high carbon emitters have operating and financial flexibility that would mitigate the impact of policies for reducing carbon emissions.

“For oil and gas companies, including those with both upstream and downstream refining operations, the credit impact of tighter emissions regulations is more muted”, says Gretchen French, a vice president and senior credit officer based in Moody’s corporate finance group in the United States.

“Increased costs from regulations are likely to be manageable for most companies, many of which have strong financial and operating profiles and a long history of adapting to and absorbing rising regulatory costs,” says French.

However, the report notes that credit pressures are building generally for companies that have carbon-intensive products and limited ability to adapt.

In addition, policy and regulatory risks are creating uncertainty that is in turn hindering investment decisions and investor flows, and while the impact of this uncertainty on most industries is harder to quantify, it is likely to become more significant as global carbon reduction policies tighten further.

Specifically, such uncertainty can raise questions about the future profitability of a business model, impacting both corporate decisions on future capital expenditure and investor decisions regarding investment allocations to certain corporates or industries.

The new Sector-In-Depth report is part of Moody’s latest efforts at stepping up its research of environmental, social and governance issues in view of the increasing influence such factors are exerting on corporate credit profiles globally and the rising prominence of associated challenges.

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