INTERVIEW
The US rating agency looks closely at climate risk to record debt issuers. Myriam Durand, director of Moody’s France and large corporate ratings for EMEA, explains how it is addressed and why it could lead to lower credit scores.
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L’Usine Nouvelle: How do you take into account the environmental risk in your logs
Myriam Durand: The essence of a credit rating is to analyze the ability of an entity to repay its debt on time and 100%. What is complicated is to have a prospective view because we do not expect this capability at a time “t”, but in the longer term.
We look at all the elements at hand, the company’s strategy, competitive positioning, positioning on the technologies of tomorrow, the financial elements, etc. This allows us to compare issuers on an equitable basis.
The environment is one of these factors and, according to the industry, which will be allotted weight in our analysis will be higher or lower. We have in fact always taken into account without the clarification as we do today. We look at long governance, exposure to natural disasters, social risk, etc. The environment is seen as one of the risks to be considered, but we are not purely environmental scoring. Our prism is always to define the ability to repay debt.
But the criterion of greenhouse gas emissions, is new to him?
Yes, but in this case we are facing a problem of financial communication by issuers that we note. We are not auditors, we do with the information given by such issuers. For example, we do not yet know what companies must disclose under Article 173 of the Law of environmental and energy transition: what are the aggregates used? How to calculate? Is it be according to French or international standards?
Today, there is no five companies that make an equivalent environmental reporting, making it difficult to integrate in our analysis because it is not a standard.
We have just published a study in which we analyze 86 economic sectors representing 68 000 billion of debt issued or while the Moody’s rating universe. We studied the environmental risk to classify these segments based direct risks, such as air pollution, soil or water, the risk of drought, exposure to natural disasters, etc., and indirect risks related to regulations implemented by states or supranational entities to counter the direct risks. But we could not use our current knowledge, this document will therefore evolve over time.
What are the risk areas?
Among the sectors with high and immediate risk, there are coal mines, which account for 29 billion dollars in debt, or the sectors of utilities and unregulated energy for 479 billion dollars in debt.
This means that in these areas, we have already started seeing migration notes. But beware, as there always generated cash flows, the note is not necessarily drop brutally. In the long term, their activities will be restricted by the regulations, but there is a gray area. Who can foresee what will be tomorrow’s emission regulations in China or other countries?
debt issuers have already seen their rating fall because of environmental risk?
We downgraded by one notch the rating of a municipality of California. It is in a drought area and this may have an impact on its ability to repay debt. It went from A1 to AA3, this remains a high note but it is a warning.
Ratings do not loosen due to environmental risk because its impact is long-term, leaving issuers time to adapt, either by finding new technologies, or taking strategic decisions divestment or just reducing debt and strengthening their capital.
If a high carbon price was fixed, what impact would that have?
It will be a factor among others to be taken into account. Regulatory changes are new factors, but do it radically changes the panorama of ratings? I do not think, at least not so upset everything. The notes will move in areas with high and immediate risk, but gradually, because we have already taken into account some of the risk.
Interview by Arnaud Dumas
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