Moody's Corporation · NYSE:MCO

Moody's — ESG Presentation (June 2021)

37 slides from Moody's's sustainability presentation, Jun 1, 2021

  1. Slide 1: Regulatory Climate Change Stress Testing Scenarios: Global Perspective

    Regulatory Climate Change Stress Testing Scenarios: Global Perspective June 1, 2021

  2. Slide 2: Moody's Analytics independence notice

    Moody's Analytics operates independently of the credit ratings activities of Moody's Investors Service. We do not comment on credit ratings or potential rating changes, and no opinion or analysis you hear during this presentation can be assumed to reflect those of the ratings agency. 2

  3. Slide 3: Today's Speakers

    Today’s Speakers Predictive Analytics Luca Magni Petr Zemcik, PhD Chris Lafakis Janet Lee Martin Wurm Director Senior Director Director Director Associate Director Climate Change Stress Testing 3

  4. Slide 4: Moody's Climate Risk Solutions

    Moody’s Climate Risk Solutions Forward-looking exposure metrics and risk analytics Transition Risk Data Physical Risk Data Assessment of 5,000 listed companies Forward-looking data capturing exposure and on-demand scoring available to to climate hazards for 5,000 listed identify transition risk expo

  5. Slide 5: Agenda

    Agenda 1. Climate change regulatory stress testing: Arising industry standard 2. Physical risk impact channels 3. Generating transition risk scenarios 4. Approach to market risk modelling Climate Change Stress Testing 5

  6. Slide 6: Climate change regulatory stress testing: Arising industry standard

    1 Climate change regulatory stress testing: Arising industry standard

  7. Slide 7: Climate Risk Scenarios

    Climate Risk Scenarios Climate Risk Variables Macro-financial Variables Physical Variables Macroeconomic Variables Global & regional temperature pathways GDP & unemployment Climate-related perils (e.g. flood, subsidence) Inflation & central bank rates Longevity Corporate profits & household income A

  8. Slide 8: Modelling Framework

    Modelling Framework Impact Channel Energy Consumption Mnemonics Mnemonics 1. Sea level rise FC$_GEO 2. Agricultural productivity FPROD$_POT_GEO 1. Coal FCOALCONQ_IGEO 3. Heat stress effect on labor productivity FPROD$_POT_GEO 2. Natural gas FNGASCONQ_IGEO 4. Human health effects FPROD$_POT_GEO 3. Pe

  9. Slide 9: Regulatory Environment

    Regulatory Environment » Network for Greening the Financial System (NGFS) and Task Force on Climate-related Financial Disclosures (TCFD) are leading voices for a call to action in the financial system. • NGFS is a group of over 35 central banks and regulatory agencies worldwide established at the Pa

  10. Slide 10: Physical risk impact channels

    2 Physical risk impact channels

  11. Slide 11: Physical Risk Impact Channels

    Physical Risk Impact Channels Roson-Sartori Damage Function Damage functions applied on economic drivers Typical expansion process Sea-level rise 1 3 economic drivers affected: Loss of land rents income Consumption due to loss in coastal • Consumption: Sea-level rise wetland causes a loss in product

  12. Slide 12: Approach

    Approach Quarterize Temperature Pathway Create quarterly temperature path for the climate scenario to match the Moody’s Analytics global model’s quarterly periodicity Link impact estimates from Roson & Sartori (2016) to key economic variables Roson and Sartori (2016) summarizes climate change impact

  13. Slide 13: Productivity Overlay – RCP 8.5

    Productivity Overlay – RCP 8.5 % Deviation from CP 0 -1 -2 -3 -4 -5 -6 HKG CHN SGP AUS GBR -7 20 30 40 50 60 Source: Moody’s Analytics Climate Change Stress Testing 13

  14. Slide 14: Real Exports Overlay – RCP 8.5

    Real Exports Overlay – RCP 8.5 % Deviation from CP 1.0 0.5 0.0 -0.5 HKG CHN SGP AUS GBR -1.0 20 30 40 50 60 Source: Moody’s Analytics Climate Change Stress Testing 14

  15. Slide 15: Real Imports Overlay – RCP 8.5

    Real Imports Overlay– RCP 8.5 % Deviation from CP 1.0 0.5 0.0 -0.5 HKG CHN SGP AUS GBR -1.0 20 30 40 50 60 Source: Moody’s Analytics Climate Change Stress Testing 15

  16. Slide 16: Real Consumption Overlay – RCP 8.5

    Real Consumption Overlay– RCP 8.5 % Deviation from CP 0.000 -0.003 HKG CHN SGP AUS GBR -0.005 20 30 40 50 60 Source: Moody’s Analytics Climate Change Stress Testing 16

  17. Slide 17: Real GDP – RCP 8.5 (PR Scenario)

    Real GDP – RCP 8.5 (PR Scenario) % Deviation from CP 1 0 -1 -2 -3 20 30 40 50 60 -4 -5 HKG CHN SGP AUS GBR -6 Source: Moody’s Analytics Climate Change Stress Testing 17

  18. Slide 18: Generating transition risk scenarios

    3 Generating transition risk scenarios

  19. Slide 19: REMIND Region to Country Map

    REMIND Region to Country Map R5 regions were only used for Armenia and Kazakhstan. The rest were REMIND regions. Sources: NGFS, Moody’s Analytics Climate Change Stress Testing 19

  20. Slide 20: Real GDP Index – Hong Kong

    Real GDP Index – Hong Kong 2020Q4=100 160 BL CP LP EP PR 150 140 130 120 110 100 90 20Q1 25Q1 30Q1 35Q1 40Q1 45Q1 50Q1 55Q1 60Q1 Sources: HKSARG, Moody’s Analytics Climate Change Stress Testing 20

  21. Slide 21: Country GDP Targets Comparison

    Country GDP Targets Comparison 2019Q4=100, NGFS Early Policy scenario 270 250 Europe Ireland U.K. 230 210 190 170 150 130 110 90 21 26 31 36 41 46 51 56 Sources: NGFS, Moody’s Analytics Climate Change Stress Testing 21

  22. Slide 22: Primary Energy Coal Consumption – U.S.

    Primary Energy Coal Consumption – U.S. EJ/yr 16 14 CP EP LP 12 10 8 6 4 2 0 20 25 30 35 40 45 50 55 60 Sources: NGFS, Moody’s Analytics Climate Change Stress Testing 22

  23. Slide 23: U.K. Carbon Dioxide Tax Rate

    U.K. Carbon Dioxide Tax Rate GBP per metric ton, NSA 4000 NGFS Current (Hot house world) 3000 NGFS Delay (Disorderly) NGFS Immediate (Orderly) 2000 1000 0 10 20F 30F 40F 50F 60F 70F 80F 90F 100F Sources: Network for Greening the Financial System; Moody’s Analytics Climate Change Stress Testing 23

  24. Slide 24: U.K. Effective Domestic Price: Coal

    U.K. Effective Domestic Price: Coal 1/100 GBP per #, NSA (Log scale) NGFS Current (Hot house world) NGFS Delay (Disorderly) NGFS Immediate (Orderly) 10000 1000 15 25F 35F 45F 55F 65F 75F 85F 95F Sources: U.K. Department for Business, Energy & Industrial Strategy; Moody’s Analytics Climate Change Str

  25. Slide 25: Approach to market risk modelling

    4 Approach to market risk modelling

  26. Slide 26: Key Steps

    Key Steps » We model the impact of physical and transition risks on equity and credit markets, frontloading shocks as markets process them. » We assume markets overreact under a disorderly transition. » We distinguish equity and credit market responses between more affected carbon- intensive and les

  27. Slide 27: U.S. Equity Prices

    U.S. Equity Prices S&P 500, Index 1941-43=10 NSA 10,000 9,000 CP EP LP 8,000 7,000 6,000 5,000 4,000 3,000 2,000 2020Q1 2025Q1 2030Q1 2035Q1 2040Q1 Sources: Standard & Poor’s, Moody’s Analytics Climate Change Stress Testing 27

  28. Slide 28: Aggregate Equity Shock by Geography

    Aggregate Equity Shock by Geography % Long-run decline in market value relative to current policy Geography Early Policy Late Policy United States 5.6% 8.3% Hong Kong 4.1% 6.7% China 17% 23% Germany 6.8% 10.4% India 9% 12% • Determined by pre-specified equity shocks by industry and country industry

  29. Slide 29: Equities Disaggregation

    Equities Disaggregation Step 1 Step 2 Step 3 Produce equations for each Combine forecasts using Extract non-carbon intensive industry linking industry index to country-specific drivers industries as residuals country index and other drivers and bottom-up overlays P Auto PAuto Current P Other No over

  30. Slide 30: U.S. Sub-index Equity Shocks

    U.S. Sub-index Equity Shocks S&P 500, Shock relative to CP, % 0% -5% -10% -15% -20% -25% -30% Carbon-intensive (EP) Carbon-intensive (LP) -35% Other (EP) -40% Other (LP) -45% 2020 2025 2030 2035 2040 2045 2050 2055 2060 Sources: Standard & Poor’s, Moody’s Analytics Climate Change Stress Testing 30

  31. Slide 31: HKG Sub-index Equity Shocks

    HKG Sub-index Equity Shocks Hang Seng, Shock relative to CP, % 0% -5% -10% -15% -20% -25% -30% -35% Carbon-intensive (EP) Carbon-intensive (LP) -40% Other (EP) -45% Other (LP) -50% 2020 2025 2030 2035 2040 2045 2050 2055 2060 Sources: SIX Financial, Moody’s Analytics Climate Change Stress Testing 31

  32. Slide 32: Corporate Credit Spreads With Ratings Transition

    Corporate Credit Spreads With Ratings Transition Step 1 Step 2 Step 3 Forecast equations for aggregate Combine sector specific ratings Combine aggregate credit ratings categories linking to with sector equity shocks to spread with ratings transition market volatility predict ratings transition Credi

  33. Slide 33: Ba1: HKG – Credit Shocks

    Ba1: HKG – Credit Shocks Climate Change Stress Testing 33

  34. Slide 34: Key Takeaways

    Key Takeaways » Physical risk affects countries in APAC more than in the U.S. and the U.K. » Transition risk impact is generated via carbon tax. » HKMA separated physical risk from the transition risk. » A reference scenario is required. » Additional assumptions on pricing of assets are required to

  35. Slide 35: Q&A

    Q&A Additional questions? Email us at help@economy.com Additional Analysis, Whitepapers, Case Studies and Solution Information: www.economy.com/products/consumer-credit-analytics/portfolio-analyzer Climate Change Stress Testing 35

  36. Slide 36: Sustainability in Focus

    SUSTAINABILITY IN FOCUS

  37. Slide 37: Climate Change Stress Testing

    This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. © 2021 Moody’s Corporation, Moody’s Inves

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