Your Approach to carbon transition may affect your Credit Score
My company Leading Green is founded on the belief that Business leaders and organisations that integrate sustainability into their business thinking and leadership culture will benefit in the long-term through a better strategic mindset for future growth, higher investor interest, capital investment delivery and ultimately a lower corporate risk profile that delivers long term financial value with innovation and market branding. I am particularly interested how carbon transition is being strategically led within organisations with the highest exposure to climate change credit risk.
Climate Change credit risk
It was therefore of interest to read in a recent edition of GreenBuzz that Moody’s, one of the world’s leading credit rating agencies had proposed a scoring framework for assessing carbon transition risk. This will be of interest in evaluating the transition towards a low carbon future of some of the more energy intensive or dependent sectors, and especially those past investments are at risk of being stranded as the implications of climate change extend into the most world’s most obstinate boardrooms.
Impact assessment & carbon transition
Impact Assessment (IA) professionals have for many years grappled with the problem of how one multi-$billion or $million investment will impact on a region’s or society’s air quality or climate change footprint, looking at proposed investments in terms of their solo contributions, and struggling to truly evaluate their cumulative impacts. Tools such as Technology Impact Assessment allow us to evaluate with greater visibility and transparency the global benefits or negatives of technology as we shift towards a lower carbon economy.
The move by Moody’s towards the introduction of climate change credit risk is of interest to IA and ESG professionals in that it could herald the start of an investment trend that better identifies carbon transition investment risk, business strategies and capital investment opportunities with an ESG’s financial value assessment. Many ESG and IA assessment approaches & models are at risk of focusing too much on the identification of social & ethical values rather than a more comprehensive evaluation of an investors or multi$ project proponent’s understanding of how environmental and social factors impact on the core financial objectives of the project.
The poor investment record of Mega-Hydro Dams
If you want a case in point look at the global investments for large hydro-power schemes and how far apart the early assessments of project costs are from their final ‘constructed’ costs (often by factors of $billions) and how often their project timescales were delayed (>years). A reflection of the investor and lender’s reluctance to assess environmental and social risks earlier in the investment cycle and to clarify the upstream linkage between social and environmental parameters and financial risk.
Carbon transitionn & Infrastructure Investment
Carbon transitionwithin investment portfolios, organisations and within technology/marketplace sectors must become, and is increasingly likely to become, a core parameter within the global society’s climate change adaptation and how the continuing flows of investment capital will impact on future growth and carbon release. If organisations and government are slow to react to risk and carbon transition, then perhaps a more risk adverse appetite amongst financial lenders and investors will prevent much of the downstream arguments between society and business that prevent capital projects and asset investments gaining the one thing that they all require – consent to build the proposed asset.
Carbon transition – Implications for policy, legal, technology and market changes
It was of interest to read in the article that Moody’s defines carbon transition risk as the implications of the policy, legal, technology and market changes that are likely to affect a company in its transition to a lower-carbon economy. These are the often the intangible vales that lie outside traditional boardroom thinking and rarely make it into formal financial risk analysis, credit ratings or creditworthiness. Moody’s propose a 10-point scale across four key components that seeks to identify an organisations credit risk and transition towards carbon transition. The will help reflect 4 key parameters:
- its current business profile (survivability in the current marketplace);
- its technology, market and policy exposure (risk of stranded assets, exposure to disruptive technology and societal megatrends);
- its medium-term response activities (is its boardroom awake to the risks!); and
- its longer-term resilience (potential for value and growth).
Implications for ESG
This is a move to be welcomed as the development of comprehensive ESG models is still in its infancy, as is the marketplace’s understanding of them and their ability to drive better financial decision making. In addition, it starts to position IA and ESG as ‘active’ tools that enhance decision-making rather than their often perceived ‘negative’ image as blockages to investment fluidity and choice. It also starts to open to the marketplace the maturity of some boardrooms towards social, environmental and carbon transition/climate risks and how they are perceived. Many ESG reports often contain performance data on ESG issues that masks any real cultural or leadership change towards sustainability in business and environmental risk management. If you want evidence on this, just look at how many organisations there are out there who have held environmental certification under ISO14001 for many years, but who are now struggling to re-certify to the new standard that requires auditable proof of linkage within their organisations between the executive leadership groups and their organisation’s environmental risk performance.
So, the takeaway message is what is the long-term strategic value for organisational leaders in better aligning sustainability, environmental risk or carbon transition / adaptation strategies within their core corporate and investment planning strategies. It is becoming increasing clear to sustainability advisers, chief financial officers, some CEOs and their Boards that in the future organisations with higher ESG ratings and a strategic mindset to sustainability in business are likely to experience lower exposure to disruptive market risks, protect asset investments or at least minimise stranded asset investments within portfolios avoiding large drawdowns, and lower risk within their sector or marketplace.
If Moody’s initiative is a success it will also reinforce these benefits through lower cost of capital and higher investor interest, in particular the type of investor who is likely to take a longer, rather than a shorter, term interest in your organisation’s financial health and growth.