Over $4 trillion in listed debt is exposed to heightened credit risks associated with environmental considerations, according to a new analysis released by Moody’s Investor Service, marking an increase of 27% from 2020, and more than doubling since 2015.

The analysis also found that the share of debt in sectors with ‘high’ or ‘very high’ environmental risks has been increasing as well, rising to 5.1% of total rated debt outstanding, compared to just 3% in 2015.

Six sectors were identified as facing “very high” environmental credit risk, including coal mining and coal terminals, chemicals, mining – metals and other materials excluding coal, independent exploration and production (E&P), integrated oil and gas, and refining and marketing.

The Moody’s report examined environmental risks that can arise from a range of sources, including regulatory and policy issues, as well as environmental hazards, or a combination of both. The environmental considerations most relevant to credit quality included carbon transition, physical physical climate risks such as exposure to heat stress, floods or hurricanes, water management, waste and pollution, and natural capital, such as dependence on goods and services derived from nature.

The increase in environmentally exposed debt over the past few years is primarily a function of the growth in the number of sectors categorized as being as high risk, as growing awareness of environmental issues spur policy, investor and corporate action.

Airlines were among the sectors that entered the high environmental credit risk category, as they now face the prospect of higher operating costs due to future carbon emissions regulations, with little ability to pass along the costs to customers due to competitive considerations. Similarly, the Protein and Agriculture sector is now at high risk (the only sector to move all the way from “low risk” in 2015) due to exposure to carbon transition and water management considerations, as well as issues ranging from deforestation, and land use changes to potential changes in greenhouse gas regulation. Other sectors entering the high-risk category included midstream oil & gas, and oil & gas services. Collectively, these new high risk sectors account for $765 billion in debt.

The report also assessed the exposure of sectors to each of the individual environmental risk categories, revealing that 16 sectors with $4.9 trillion in rated debt are exposed to very high or high carbon transition risk, 14 sectors with $6.4 trillion in debt are exposed to physical climate risk, 14 sectors with $4.4 trillion in debt are exposed to waste and pollution risk, 9 sectors with $1.7 trillion in debt are exposed to natural capital related risks, and eight sectors with $1.9 trillion in debt have high exposure to water management risk.

Ram Sri-Saravanapavaan, Vice President – Senior Analyst, ESG at Moody’s Investors Service, said:

“Debt held by sectors exposed to heightened environmental credit risks is rising as a share of our total rated debt universe, indicating that environmental considerations are increasingly pressuring issuers’ credit profiles and will continue to do so.”

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