The growing number of net-zero targets being set by governments and financial institutions plus the increasing requirements for disclosure of climate risk will raise credit risk and increase the cost of capital for carbon-intensive activities, Moody's Investors Service said Tuesday in a report.
"We expect pressure to inexorably rise for major producers and users of hydrocarbons to adjust business strategies to implement credible transition plans," the report said.
Noting the current patchwork of policies and gradual changes in disclosure requirements or moves by investment funds to reduce their fossil-fuel holdings, the full implications of net-zero initiatives will become clearer, as emissions reduction goals by major economies converge. The Biden Administration Climate Summit last week "confirmed that a major convergence and acceleration in global policies to reduce emissions is under way," the report said.
With companies under increasing pressure to respond to disclosure demands, "the breadth of climate policy initiatives across policymakers, prudential supervisors and providers of capital is changing the finance landscape for companies, increasing the likelihood that credible carbon transition plans will provide a greater differentiating factor for credit strength," the report said.
