New risks, Opportunities for Banks with Shift to Low Carbon Economy: Moody’s

The transition to a low carbon economy presents new risks and opportunities for financial institutions because of regulatory developments, technological advancements, and shifting market preferences, said Moody’s Investors Service.

The ratings and research firm said banks may be adversely impacted by these transitional risks due to the magnification of liabilities on their balance sheets that are at risk of impairment over time.

“However, the associated need for financing for the transition also presents opportunities for banks to develop new offerings focused on low carbon business strategies and investments,” it said in its ESG Insights report.

In addition to understanding their counterparties’ emissions as a baseline for identifying their financial risk, banks are also facing increasing pressure to accurately assess and disclose their financed emissions.

Moody’s explained that banks are primarily exposed to transition risks and associated opportunities through their portfolios, which means there are layers of complexity when it comes to both assessing their transition risk and opportunities and implementing strategies to address them.

“There is a growing focus on accurately accounting for banks’ financed emissions, which requires both a comprehensive understanding of portfolio companies’ emissions as well as detailed information on the financing.

“At the same time, banks also need to understand how those companies they are financing may face risks due to the transition which may affect the viability of their loans,” it added.

Leveraging data on companies’ greenhouse gas emissions and their risk management provides an important first step from which banks can develop lending strategies that minimise their risk and embrace opportunities, as well as take steps to determine their financed emissions, it said.