- Environment-related risk is a growing focus for investors
- Companies in high-risk sectors face greater regulatory and investor scrutiny
- High-risk sectors include metals mining, coal mining and oil and gas
Major industrial sectors that rely on natural capital can also adversely affect natural resources. Environment-related risk is a growing focus for investors as biodiversity loss globally intensifies. As a result, nine sectors—including metals mining, coal mining, and the oil and gas industry—have nearly $1.9 trillion in rated debt with very high or high exposure to natural capital, Moody’s Investor Service said in a recent report. Natural capital, which Moody’s describes as assets provided by nature that are essential for human habitation and economic activity, can pose credit risks for issuers, the credit rating agency said.
In its report, Moody’s considers two interrelated pathways. One is the impact that companies, governments, and other entities can have on the environment, leading to direct and indirect loss of revenue. The second pathway is the dependency of firms on the ecosystem, such as goods and materials derived from natural capital.
Credit Risk For Issuers
“Investors and policy makers are becoming increasingly focused on nature-related risks as biodiversity loss intensifies, in part as a result of global climate change,” Moody’s says.
“Companies in high-risk sectors face the likelihood of greater regulatory and investor scrutiny,” the credit rating agency notes.
The high-risk sectors include metals mining—a key industry at the beginning of the EV battery and solar supply chains—as well as coal mining, independent oil and gas E&P companies, oilfield services, and integrated oil and gas companies, according to Moody’s analysis.
Of those, metals and other materials mining has $253 billion in Moody’s rated debt with very high natural capital exposure. Mining also has the greatest impact on the ecosystems, per the report. The sector with the second-greatest impact on natural resources is coal mining and coal terminals, but its rated debt exposure is estimated at just $10 billion. Independent oil and gas E&P firms are also among the sectors with the greatest impact, and with a high exposure, at $365 billion, followed by the oilfield services industry, with an exposure of $141 billion, and integrated oil and gas companies. Those have the greatest credit risk exposure of a combined $799 billion, and have an impact on ecosystems and depend on them.
Protein and agriculture, steel, and environmental services and waste management are the sectors most dependent on natural resources, Moody’s analysis showed.
ESG Credit Risks Will Only Grow
As investors and policymakers focus more and more on sustainability and ESG, companies—regardless of the sector—which do not have credible ESG management strategies could see serious financial losses on top of a tarnished reputation, according to Moody’s.
“Risks such as ecosystem health, biodiversity loss and natural resource management are rising up the policy and investor agenda,” Rahul Ghosh, managing director of environmental, social and governance issues at Moody’s, said, as carried by Bloomberg.
“Considerations around the Environmental, Social, and Governance (ESG) aspects of companies have become a factor widely taken into account by investors and other market participants, consumers, and stakeholders,” Moody’s Analytics said in a report earlier this year.
“Companies that develop responsible Environmental, Social, and Governance (ESG) practices and strive to mitigate ESG risks experience fewer noteworthy ESG-related controversies and potentially generate better shareholder returns,” Moody’s Analytics said in a white paper in June detailing the key findings of two new research studies.
“ESG controversies can inflict reputational damage with significant financial and legal repercussions. Firms that actively manage these risks do a better job of boosting shareholder value,” said Doug Dwyer, Managing Director at Moody’s Analytics, who led the research.
“Together, the results of these research studies show the relevance of ESG controversies to a firm’s financial performance and, importantly, that companies can influence their ESG risk management cultures, while benefiting shareholders and other stakeholders,” Dwyer added.
Energy Transition Needs Metals Mining
The industry of the so-called energy transition metals—lithium, cobalt, graphite, and rare earths—which, according to Moody’s has the greatest impact on natural capital, needs to tackle a “significant” ESG challenge, Wood Mackenzie said in a report in July.
The ESG dilemma for the industry providing the key metals for clean energy generation is clear. “Can vital energy transition metals markets ramp up production fast enough to satisfy demand, while also revolutionising supply chains to meet ever-more stringent ESG requirements?” WoodMac’s researchers and analysts wonder.
Decarbonization of operations will be crucial for producers of metals commodities, analysts say.
For example, natural graphite, mined mainly in China and, increasingly, Mozambique and Madagascar, is subject to traditional mining ESG concerns, such as water use and equipment and transport emissions. The downstream process of purification, currently done only in China, has much deeper ESG concerns with corrosive materials and disposal, WoodMac said.
In lithium mining and processing, high water consumption at lithium brine operations is one ESG concern, while the refining of the lithium mineral concentrate has a very high carbon emissions profile, the consultancy noted.
“Lithium, cobalt, graphite and rare earths face escalating demand – but meeting it calls for ESG quality as well as quantity,” WoodMac says.