Moody's Corporation · NYSE:MCO
Moody's — ESG Presentation (May 2021)
46 slides from Moody's's sustainability presentation, May 2021
Slide 1: Connecting ESG Assessments into the Credit Portfolio
Connecting ESG Assessments into the Credit Portfolio Chapter 1: Climate Change and the Corporate sector Damian Watson, James T. Edwards and Rebecca Cui May 2021
Slide 2: Agenda
Agenda Damian Watson Senior Director 1. Overview of Moody’s ESG Offering Head of Customer Success, EMEA Predictive Analytics 2. Quantifying Climate-Induced Corporate Credit Risk 3. Patterns of Risk across the Credit Edge James Edwards Director Public Universe Credit Default Modelling Solutions - Ove
Slide 3: Moody's Overview
Moody’s Overview Providing trusted insights and integrated analytics leveraging our deep domain and risk expertise Moody’s Moody’s Investors Service Moody’s Analytics Leading Credit Rating Agency Leader in Risk Solutions Integrate ESG to satisfy Integrate ESG to satisfy market demand market demand M
Slide 4: Moody's ESG Solutions Group
Moody’s ESG Solutions Group Bringing quality, rigor and consistency to the most comprehensive spectrum of capabilities serving core segments as the economy greens SME Solutions » Brings together over 30 years of ESG expertise Climate Index to meet rapidly Solutions Solutions evolving needs » Deliver
Slide 5: Covid-19 and climate change as 'Green Swan' events
‘Devastating’ impact of Covid-19 Pandemic Accelerated impetus to evaluate Risks of The framework required to measure the highlight the risks of failure to act Climate Change financial impact of Climate Change is particularly challenging Graph Title Source: OECD Economic Outlook, March 2021 Source: G
Slide 6: Climate-Adjusted Credit Metrics: Overview
1 Climate-Adjusted Credit Metrics: Overview
Slide 7: From Climate Risks to Financial Metrics
From Climate Risks to Financial Metrics » Our credit metrics will be part of a full-suite of scenario-conditioned data analytics: Physical Risks Transition Risks (Extreme weather events, gradual climate change) (Policy, technology, consumer preferences) Scenario Analysis Recon- Lower value Increase
Slide 8: Public EDF Model Employs Market Data to Build a Structural Measure of Credit Risk
Public EDF Model Employs Market Data to Build a Structural Measure of Credit Risk Asset Equity Liability Volatility Market Default Asset Point Distance to Default Bond Valuation Term Structure Climate-Adjusted EDF Implied Rating Climate Change and the Corporate sector 8
Slide 9: Climate Risk Affects the Drivers of the EDF Model
Climate Risk Affects the Drivers of the EDF Model Transition Physical Risk Risk Asset Equity Liability Volatility Market Default Asset Point Distance to Default Bond Valuation Term Structure Climate-Adjusted EDF Implied Rating Climate Change and the Corporate sector 9
Slide 10: Physical Risk: Quantifying Frequency and Magnitude of Climate-Related Asset Shocks
Physical Risk: Quantifying Frequency and Magnitude of Climate-Related Asset Shocks Global Economic Firm Location Economic Firm Asset Shock Damage Paths Damage Paths Distributions Historical Climate Events Climate Models: FourTwoSeven Corporate Climate Observed EDF Asset Returns for Emissions > Tempe
Slide 11: Transition Risk: Quantifying Scenario-Conditional Cash Flows
Transition Risk: Quantifying Scenario-Conditional Cash Flows Component 1: Global/Sectoral Economic Impact Model Transition Effect on Global Economy Scenario Transition Scenario Carbon Tax = X Technology Progress = Y Effect on Effect on Effect on Effect on Effect on Socioeconomic Trends= Z Fossil-Fue
Slide 12: Which Climate Scenarios to Analyze?
Which Climate Scenarios to Analyze? » One important set of climate scenarios are the NGFS scenarios, which have also been proposed for the 2021 BES exercise: Climate Change and the Corporate sector 12
Slide 13: Investor Expectation Paths within Scenario Matter
Investor Expectation Paths within Scenario Matter Expectation Assumption: Uncertainty Until Policy is Announced Early Policy Path Expectations Late Policy Path Expectations No Policy Path Expectations % Physical % Physical % Physical Year Early Policy Late Policy No Policy Early Policy Late Policy N
Slide 14: Example of a Baseline PD Term Structure
Example of a Baseline PD Term Structure Royal Dutch Shell PLC Climate Change and the Corporate sector 14
Slide 15: Effect of Physical Climate Risk on EDFs
Effect of Physical Climate Risk on EDFs 427 Total Score Royal Dutch Shell PLC 59.0 Investor Expectations Assumption: Physical Climate damages not currently priced, but perfect scenario foresight occurs when announced Climate Change and the Corporate sector 15
Slide 16: Effect of Transition Risk: Earnings and Asset Paths
Effect of Transition Risk: Earnings and Asset Paths Royal Dutch Shell PLC Investor Expectations Assumption: Perfect scenario foresight occurs when announced Climate Change and the Corporate sector 16
Slide 17: Effect of Transition Risk on EDFs
Effect of Transition Risk on EDFs Royal Dutch Shell PLC Investor Expectations Assumption: Perfect scenario foresight occurs when announced Climate Change and the Corporate sector 17
Slide 18: Effect of Combined Climate Risk on EDFs
Effect of Combined Climate Risk on EDFs Royal Dutch Shell PLC Investor Expectations Assumption: Physical Climate damages not currently priced, but perfect scenario foresight occurs when announced Climate Change and the Corporate sector 18
Slide 19: Main Exercise for this Webinar
Main Exercise for this Webinar » Within the Climate-Adjusted EDF Framework, analyze risk for the 40,000+ names in the Public EDF universe of global public companies » Identify the overall distribution of climate-adjusted risk and the important drivers of relative risk worldwide Climate Change and th
Slide 20: Climate Risk Distributions across Scenarios and Time Horizons
2 Climate Risk Distributions across Scenarios and Time Horizons
Slide 21: Average Physical-Adjusted EDF Term Structures
Average Physical-Adjusted EDF Term Structures Investor Expectations Assumption: Perfect scenario foresight occurs when announced Climate Change and the Corporate sector 21
Slide 22: Average Transition-Adjusted EDF Term Structures
Average Transition-Adjusted EDF Term Structures Investor Expectations Assumption: Perfect scenario foresight occurs when announced Climate Change and the Corporate sector 22
Slide 23: Average Combined EDF Term Structures
Average Combined EDF Term Structures Investor Expectations Assumption: Perfect scenario foresight occurs when announced Climate Change and the Corporate sector 23
Slide 24: Relative Risk Varies Widely within each Scenario
Relative Risk Varies Widely within each Scenario Climate Change and the Corporate sector 24
Slide 25: Average Transition-Adjusted EDF – High Exposure Sector Portfolio
Average Transition-Adjusted EDF – High Exposure Sector Portfolio Investor Expectations Assumption: Perfect scenario foresight occurs when announced Climate Change and the Corporate sector 25
Slide 26: Average Combined-Adjusted EDF – High Exposure Sector Portfolio
Average Combined-Adjusted EDF – High Exposure Sector Portfolio Investor Expectations Assumption: Perfect scenario foresight occurs when announced Climate Change and the Corporate sector 26
Slide 27: Drivers of Relative Physical Climate Risk
3 Drivers of Relative Physical Climate Risk
Slide 28: Global Average Four Two Seven Climate Score by Country
Global Average Four Two Seven Climate Score by Country Hurricanes & Heat Stress Sea Level Rise Water Stress Wildfires Total Climate Country Floods Score Typhoons Score Score Score Score Score Score CHINA 65.7 25.9 38.5 29.8 50.0 20.8 61.0 ITALY 39.9 57.8 0.0 49.4 52.9 19.5 53.5 UNITED STATES 16.7 33
Slide 29: Global Average Four Two Seven Climate Score by Country
Global Average Four Two Seven Climate Score by Country Climate Change and the Corporate sector 29
Slide 30: Global Physical Risk Varies Widely within Countries
Global Physical Risk Varies Widely within Countries Climate Change and the Corporate sector 30
Slide 31: Global Physical Risk Varies Widely within Countries
Global Physical Risk Varies Widely within Countries Climate Change and the Corporate sector 31
Slide 32: Relationship between Physical Risk Scores and Increase in EDFs
Relationship between Physical Risk Scores and Increase in EDFs Climate Change and the Corporate sector 32
Slide 33: Relationship between Physical Risk Scores and Increase in EDFs
Relationship between Physical Risk Scores and Increase in EDFs Climate Change and the Corporate sector 33
Slide 34: Drivers of Relative Carbon Transition Risk
4 Drivers of Relative Carbon Transition Risk
Slide 35: Transition Risk Increases for High Exposure Sectors
Transition Risk Increases for High Exposure Sectors Climate Change and the Corporate sector 35
Slide 36: Transition Risk Increases for Low Exposure Sectors
Transition Risk Increases for Low Exposure Sectors Climate Change and the Corporate sector 36
Slide 37: Results Vary Within Sectors
Results Vary Within Sectors Climate Change and the Corporate sector 37
Slide 38: Case Study: Natural Gas Electricity Production
Case Study: Natural Gas Electricity Production Average Price and Costs, Early Policy Average Price and Costs, No Policy Climate Change and the Corporate sector 38
Slide 39: Case Study: Natural Gas Electricity Production
Case Study: Natural Gas Electricity Production Climate Change and the Corporate sector 39
Slide 40: Additional Drivers of Relative Firm Specific Climate Risk
5 Additional Drivers of Relative Firm Specific Climate Risk
Slide 41: Drivers of Relative Firm Risk
Drivers of Relative Firm Risk » Dominant firms with high baseline market share are more able to weather lower cost competitiveness driven by changing energy and carbon prices. » We do not see a clear differential by industry for the relationship between the magnitude of asset shocks and the severity
Slide 42: Drivers of Relative Firm Risk
Drivers of Relative Firm Risk » Firms with higher baseline asset volatility have higher realized asset shocks from physical climate shocks » Firms that are more highly leveraged will have a great credit impact from the same shock in transition-adjusted cash flows. Climate Change and the Corporate se
Slide 43: Overall Takeaways
Overall Takeaways » Climate Change has the potential for material credit effects for all corporate names in a portfolio » The magnitude of climate shocks varies widely across names, time horizons, and scenarios, and is concentrated in the most heavily affected firms and extreme outcomes. Climate Cha
Slide 44: Climate PD Converter Module
Climate PD Converter Module Climate Change and the Corporate sector 44
Slide 45: moodysanalytics.com
Moopy’s ANALYTICS Better Faster Decisions moodysanalytics.com
Slide 46: Climate Change and the Corporate sector
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