Moody's Corporation · NYSE:MCO
Moody's — Moody's Analytics — ESG Presentation (June 2021)
67 slides from Moody's's sustainability presentation, Jun 29, 2021
Slide 1: South Africa Series: ESG Assessments & Risk Management
South Africa Series: ESG Assessments & Risk Management June 29, 2021
Slide 2: Moody's Analytics operates independently of Moody's Investors Service
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
Slide 3: Today's Speakers
Today’s Speakers Predictive Analytics Brenda Solis Gonzalez Cristina Daverio Petr Zemcik, PhD James Edwards, PhD Rebecca Cui, MFE Associate Director Head of ESG Research Senior Director Director Assistant Director SA: ESG Assessments & Risk Management 3
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
Slide 5: Agenda
Agenda 1. Assessing ESG Risk Across Types of Business 2. Climate Change Risk & Stress Testing 3. Climate Change and Corporate Credit Risk 4. Conclusion SA: ESG Assessments & Risk Management 5
Slide 6: Assessing ESG Risk Across Types of Business
1 Assessing ESG Risk Across Types of Business
Slide 7: Levels of ESG Risk Assessment
Levels of ESG Risk Assessment How to bridge the disclosure data gaps Full Portfolio Coverage Full Assessment Predicted Metrics Direct in-depth company assessment using Quantitative ESG metrics estimate using detailed company information limited company information Driven by comprehensive questionnai
Slide 8: ESG Risk Assessment
ESG Risk Assessment SA: ESG Assessments & Risk Management 8
Slide 9: Vigeo Eiris ESG & Climate Data
Vigeo Eiris ESG & Climate Data Leveraging on VE data for carbon footprint & more at multiple levels of granularity ESG Assessment Scores Carbon Emissions Data » An assessment of how companies are managing their ESG » Scope 1 data (direct) risks and opportunities. » Scope 2 data (indirect) » Multiple
Slide 10: ESG Scoring - High Level Methodology
ESG Scoring - High Level Methodology A systematic view on three angles of corporate management of ESG risks Global Sector Assessment ESG Scores ESG Reports Standards Frameworks Approach 100 Advanced 40 Sector Models Leadership (60+/100) International Robust Standards and (50-59/100) 38 ESG Criteria
Slide 11: ESG Scoring – Criteria
ESG Scoring – Criteria ESG CRITERIA Environmental Domain Business Behaviour Domain Human Resources Domain Environmental Strategy Product Safety Social Dialogue Pollution Prevention and Control Information to Customers Employee Participation Green Products and Services Customer Relations Reorganisati
Slide 12: ESG Scoring – Case Study
ESG Scoring – Case Study Water Management Scores – Mining & Metals South Africa Anglo American Impala Platinum Holdings Platinum Water Score 59/100 [robust] 38/100 [limited] • General commitment on water Leadership • Quantified targets consumption • Actions to optimise the production process to redu
Slide 13: Energy Transition Assessments
Energy Transition Assessments An assessment of how companies are tackling the risks and opportunities tied to the transition to a low carbon economy What is assessed? Sector Contextualisation Assessment Scores What we identify Approach 100 Advanced Ambitious strategies, targets and Green Products 40
Slide 14: Case Study Energy Transition Assessments
Case Study Energy Transition Assessments Tracking and understanding improvement over time Title Sector 2016 2018 2020 ENEL - (zoom on renewables strategy) Public commitments and targets to develop renewables Anglo Gold Ashanti Mining and Weak Weak Weak metals Current installed renewable capacity
Slide 15: Physical Risk Management Assessments
Physical Risk Management Assessments An assessment of how companies anticipate, prevent and manage the physical risks of climate change What is assessed? Sector Contextualisation Assessment Scores What we identify Approach 100 Advanced Strong risk identification and Physical Risks 40 Sector Models L
Slide 16: Quantitative Approach for Expanding Company Coverage
Quantitative Approach for Expanding Company Coverage SA: ESG Assessments & Risk Management 16
Slide 17: Bridging the ESG Risk Data Gaps
Bridging the ESG Risk Data Gaps Applying ESG Score Predictor analytical models Portfolio Analytics Metrics Estimates Company Location Public Private Companies Companies Any Company Industry Wide Industry Company Small, Range & Type Medium Detail & Large Multinational, Company Size National and
Slide 18: Leading Features to Estimate Metrics
Leading Features to Estimate Metrics Using Machine Learning techniques to train the models Company Size, Location, Industry Macroeconomic Indicators Total assets GDP, industrial production Number of employees Population Turnover, revenues Unemployment Country, region Indebtedness Industry classifica
Slide 19: Overall ESG Score – Interpreting the Metric
Overall ESG Score – Interpreting the Metric Illustration of importance & impact direction for model features Company Size Industry * Location Mean Schooling Years UN Global Compact Participant Sovereign Score Social Solidity Income Index Red List Endangered Species Human Devel. Index Renewable Energ
Slide 20: Overall ESG Score: Heterogeneity by Region
Overall ESG Score: Heterogeneity by Region Business Size >2.6 Billion USD 2.6M – 206 Billion USD <2.6 million USD SA: ESG Assessments & Risk Management 20
Slide 21: ESG Score Predictor for Vulnerability Analysis
ESG Score Predictor for Vulnerability Analysis Key characteristics of the illustrative portfolio F U L L PO RT F O L IO AF R IC A SU BSET 107 11 Location Location countries countries US (20.31%) South Africa (52%) Japan (8.28%) Egypt (22%) 20 NACE1 China (6.39%) 18 NACE1 Nigeria (13%) industries Can
Slide 22: Relevance of Individual ESG Metrics to Sectors
Relevance of Individual ESG Metrics to Sectors Metrics in deviations from portfolio average FULL PORTFOLIO AFRICA SUBSET Overall Overall Physical Carbon Overall Overall Physical Carbon Overall Overall Energy Overall Overall Energy Environ- Govern- Risk Emissions Environ- Govern- Risk Emissions ESG S
Slide 23: Heterogeneity of Scores Across Countries
Heterogeneity of Scores Across Countries Deviation of Overall ESG score from full portfolio average, selected countries BOTSWANA BRAZIL CHINA EGYPT FRANCE GABON INDIA IVORY COAST JAPAN LIBERIA MOROCCO NETHERLANDS NEW ZEALAND RUSSIAN FEDERATION SINGAPORE SOUTH AFRICA TOGO UNITED KINGDOM UNITED STATES
Slide 24: Point-in-time & Forward-looking Analysis of Metrics
Point-in-time & Forward-looking Analysis of Metrics CO2 emissions and Overall Environment score for Africa subset 0.25 Total Portfolio Carbon Emissions (Scope 1 +2) 8 Total tonnes of CO2 equivalent Billions Overall Environment score- deviation from portfolio average 6 0.20 Zero line 4 0.15 2 0.10 0
Slide 25: Climate Change Risk and Stress Testing
2 Climate Change Risk and Stress Testing
Slide 26: Location-Specific Climate Risk
Location-Specific Climate Risk Risk Assessment 427 Climate Risk Scores Obtain climate risk scores at the facility level. 427 returns six climate event risk scores based on the geographic location provided. Climate Scenarios Modelling Build country-specific climate scenarios (e.g., NGFS Current Polic
Slide 27: 427 Data – Physical Risk Score
427 Data – Physical Risk Score On-Demand Scoring Key Features of 427 Data Facility Risk Score Score single assets or large portfolios via an interactive, browser-based application or API Analyze data and underlying climate indicators via multiple visualizations Score thousands of properties in minut
Slide 28: Physical Climate Risk Score Data
Physical Climate Risk Score 427 Data » 250 random names of the portfolio and ran the physical risk climate scores within the on-demand scoring application. » Six climate hazards assessed at the facility-level: floods, sea level rise, water stress, heat stress, wildfire, and hurricanes & typhons. » M
Slide 29: Physical Climate Risk Score (cont.)
Physical Climate Risk Score (cont.) South Africa Flood Frequency Based on 250 Random Locations SA: ESG Assessments & Risk Management 29
Slide 30: Physical Climate Risk Score (cont.)
Physical Climate Risk Score (cont.) South Africa Flood Severity Based on 250 Random Locations SA: ESG Assessments & Risk Management 30
Slide 31: 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
Slide 32: 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
Slide 33: 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
Slide 34: Physical Risks: Health and Tourism
Physical Risks: Health and Tourism Quarterize Temperature Pathway Impact Calculations Create quarterly temperature path for the climate scenario to match the quarterly periodicity of the Moody’s Analytics global model Link impact estimates from Roson & Sartori (2016) to key economic variables Roson
Slide 35: Chronic Physical Risk
Chronic Physical Risk Moody’s Analytics physical risk assessment is based on: Energy Demand Tourism » Combined output delta » Temperature pathways from NGFS Scenarios » Chronic physical risk (vs acute) Heat & labour Sea Level Rise Productivity » Forecasting horizon from 2050 to 2100 » Transition ris
Slide 36: Climate-Adjusted Credit Risk Approach
Climate-Adjusted Credit Risk Approach Scenario Standard Model Loss Distribution Portfolio NO Frequency Climate of Climate Event Events Flag HPI(S), UR(S) YES Severity of Climate PDs (S), LGDs (S) Events PDs, LGDs SA: ESG Assessments & Risk Management 36
Slide 37: Climate Change and Corporate Credit Risk
3 Climate Change and Corporate Credit Risk
Slide 38: 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 in
Slide 39: 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 SA: ESG Assessments & Risk Management 39
Slide 40: 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 SA: ESG Assessments & Risk Management 40
Slide 41: Climate PD Converter Module
Climate PD Converter Module SA: ESG Assessments & Risk Management 41
Slide 42: 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 43: 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 44: 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: SA: ESG Assessments & Risk Management 44
Slide 45: 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 46: Example of a Baseline PD Term Structure
Example of a Baseline PD Term Structure Exxaro Resources LTD. SA: ESG Assessments & Risk Management 46
Slide 47: Effect of Physical Climate Risk on EDFs
Effect of Physical Climate Risk on EDFs Exxaro Resources LTD. 427 Total Score 63 Investor Expectations Assumption: Physical Climate damages not currently priced, but perfect scenario foresight occurs when announced SA: ESG Assessments & Risk Management 47
Slide 48: Effect of Transition Risk: Earnings and Asset Paths
Effect of Transition Risk: Earnings and Asset Paths Exxaro Resources LTD. Investor Expectations Assumption: Perfect scenario foresight occurs when announced SA: ESG Assessments & Risk Management 48
Slide 49: Effect of Transition Risk on EDFs
Effect of Transition Risk on EDFs Exxaro Resources LTD. Investor Expectations Assumption: Perfect scenario foresight occurs when announced SA: ESG Assessments & Risk Management 49
Slide 50: Effect of Combined Climate Risk on EDFs
Effect of Combined Climate Risk on EDFs Exxaro Resources LTD. Investor Expectations Assumption: Physical Climate damages not currently priced, but perfect scenario foresight occurs when announced SA: ESG Assessments & Risk Management 50
Slide 51: Analyzing Risk Across the Public Universe
Analyzing Risk Across the Public Universe » 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 SA: ESG As
Slide 52: Average Physical-Adjusted EDF Term Structures
Average Physical-Adjusted EDF Term Structures Investor Expectations Assumption: Perfect scenario foresight occurs when announced SA: ESG Assessments & Risk Management 52
Slide 53: Average Transition-Adjusted EDF Term Structures
Average Transition-Adjusted EDF Term Structures Investor Expectations Assumption: Perfect scenario foresight occurs when announced SA: ESG Assessments & Risk Management 53
Slide 54: 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 SA: ESG Assessments & Risk Management 54
Slide 55: Average Physical-Adjusted EDF – South Africa Only
Average Physical-Adjusted EDF – South Africa Only Investor Expectations Assumption: Perfect scenario foresight occurs when announced SA: ESG Assessments & Risk Management 55
Slide 56: Average Transition-Adjusted EDF – South Africa Only
Average Transition-Adjusted EDF – South Africa Only Investor Expectations Assumption: Perfect scenario foresight occurs when announced SA: ESG Assessments & Risk Management 56
Slide 57: Average Combined-Adjusted EDF – South Africa Only
Average Combined-Adjusted EDF – South Africa Only Investor Expectations Assumption: Perfect scenario foresight occurs when announced SA: ESG Assessments & Risk Management 57
Slide 58: Relationship between Physical Risk Scores and Increase in EDFs
Relationship between Physical Risk Scores and Increase in EDFs SA: ESG Assessments & Risk Management 58
Slide 59: Relationship between Physical Risk Scores and Increase in EDFs (SA Names Highlighted)
Relationship between Physical Risk Scores and Increase in EDFs (SA Names Highlighted) SA: ESG Assessments & Risk Management 59
Slide 60: Relationship between Physical Risk Scores and Increase in EDFs (SA Names Highlighted)
Relationship between Physical Risk Scores and Increase in EDFs (SA Names Highlighted) SA: ESG Assessments & Risk Management 60
Slide 61: Transition Risk Increases for High Exposure Sectors
Transition Risk Increases for High Exposure Sectors Mean of 1 Year PD Increase Mean of 10 Year PD Increase Sector Name Early Policy Late Policy No Policy Early Policy Late Policy No Policy Coal to Liquid Refining 194.6% -21.6% -21.6% 2154.7% 2473.8% -61.9% Gas Processing 194.6% -21.6% -21.6% 2154.7%
Slide 62: Transition Risk Increases for Low Exposure Sectors
Transition Risk Increases for Low Exposure Sectors SA: ESG Assessments & Risk Management 62
Slide 63: Conclusion
4 Conclusion
Slide 64: Key Takeaways
Key Takeaways » The assessment of ESG risk is possible either through direct company assessment or building score estimates if direct assessment is not available. » Quantitative methodologies can be applied especially when the data gaps are present and/or the number of companies in a portfolio is la
Slide 65: Q&A
Q&A Additional questions? Email us at ma-webinars@moodys.com Additional Analysis, Whitepapers, Case Studies and Solution Information: www.economy.com/products/consumer-credit-analytics/portfolio-analyzer SA: ESG Assessments & Risk Management 65
Slide 66: Sustainability in Focus
SUSTAINABILITY IN FOCUS
Slide 67: SA: ESG Assessments & Risk Management
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