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Moody's finds many energy companies slow to show economic risk of climate change

U.S. and European companies operating within emissions-sensitive industries are getting better at disclosing their risks from climate change but are slow to report potential financial impacts as recommended by the Financial Stability Board's Task Force on Climate-Related Financial Disclosures, a Moody's study found.

"Although companies have made some progress in the level of disclosure they provide, standardized and consistent quantification of financial impact from climate risks is still in a nascent stage," Moody's said Oct. 21. "Full adoption of standardized frameworks will likely take several years as companies work to quantify financial impacts, set metrics and targets, and demonstrate their ability to withstand different climate scenarios."

The study of 28 unnamed Moody's-rated companies in environmentally sensitive industries, including integrated oil and gas, oil and gas refining and marketing and regulated and unregulated utilities, found about 80% of the sample companies said climate change is affecting their strategic decisions. All of the companies disclosed direct greenhouse gas emissions and 90% included at least one emission-reduction target. However, only two of the companies linked their climate expectations to future financial impact.

One of them was an unnamed European utility, which published a table highlighting the positive and negative impacts on its costs, revenue and, ultimately, on its projected EBITDA. The company outlined the impacts in detailed cash terms, spanning a range of physical variables including temperature, rainfall, wind and irradiation.

"These disclosures provide investors with a more precise quantification of the risks or opportunities that would arise from the utility's climate expectations (or indeed from the investors' own climate expectations)," the Moody's analysts said.

In addition, an integrated U.S. oil and gas company disclosed the approximate value of undeveloped reserves, which according to its own undisclosed pricing and demand assumptions, may not be profitably developed under a 2 degrees Celsius scenario.

The 2 degrees Celsius scenario lays out an energy system pathway and a CO2 emissions trajectory consistent with at least a 50% chance of limiting the average global temperature increase to 2 degrees Celsius by 2100, according to the International Energy Agency. This scenario is the central climate mitigation scenario and will require a highly ambitious and challenging transformation of the global energy sector, the IEA said.

In June 2017, the Financial Stability Board, or FSB, Task Force on Climate-related Financial Disclosures, or TCFD, issued final recommendations providing a framework for companies, through the existing reporting process, to more effectively make climate-related financial disclosures. The task force "emphasized the importance of transparency in pricing risk — including risk related to climate change to support informed, efficient capital-allocation decisions," the board said.

The FSB said the TCFD recognized the challenges of measuring and disclosing information on risks related to climate change but determined that the practices and techniques would evolve more rapidly by moving climate-related issues into mainstream annual financial filings. The TCFD made the reporting voluntary.

Moody's said investors, policymakers and regulators support the drive for better information and disclosures of the financial risks and opportunities related to climate change. The study found that for 75% of the companies polled, boards had explicit involvement, typically signing off on disclosures and plans. For about 80% of the companies, the boards and management had a stated alignment of views on the topic, while 40% of the companies incentivize management in some part on environmental measures. The management and boards of 80% of the respondents also mentioned climate change as a focus for strategic decisions.

The TCFD said in 2018 that the transition to a lower-carbon economy is estimated to require an average of $3.5 trillion per year in energy sector investments for the foreseeable future.

"While generating new investment opportunities, the risk-return profile of companies exposed to climate-related risks could change significantly because of physical impacts of climate change, climate policy, or new technologies," the task force said.