Potential action to tackle environmental issues, such as building resilience against the effects of physical climate risks and protecting biodiversity, as well as addressing social issues including human rights and diversity, could have ESG credit implications across sectors in 2022, said Moody’s recently.
The credit impact of carbon transition risk will also become increasingly evident for carbon-intensive industries, the credit rating agency added.
"As awareness grows of the potential consequences of global warming — and the limitations of countries' decarbonisation commitments at COP26 — investors are likely to become more mindful of the financial impacts of physical climate risk," said Lucia Lopez, Vice President – Senior Credit Officer at Moody's Investors Service and lead author of the report.
"For example, there are material differences in sovereigns' exposure and resilience to physical climate change caused by global warming, with some emerging markets considerably more exposed,” she added.
In addition, the credit impacts of carbon transition risk will become more evident in the year ahead, Lopez noted.
Net zero initiatives by the financial sector could lead to greater credit strain on carbon-intensive entities over time by potentially limiting funding available from the capital markets especially for companies that are weakly positioned in their net-zero journey. She said.
Investors will also focus more on natural capital and biodiversity, which are inextricably linked to climate change but have not been as closely considered by financial markets, she predicted.
An important milestone will be the planned finalisation in May 2022 of the UN Convention on Biological Diversity's global biodiversity framework, which aims to put biodiversity on a path to recovery by 2030 at the latest, according to Moody’s.
Initiatives to improve corporate ESG disclosures will continue to gain traction in 2022, the firm said.
The global push will continue to spotlight environmental risk, but there will also be emphasis on addressing social issues including human rights, labor issues, and gender and racial diversity, the firm predicted.
Greater focus on social and environmental risk management, as well as a strong push in some regions to enhance board-level independence, are likely to enhance transparency and credit quality over time, Moody’s noted.