Financial firms that shift credit to green players best positioned: Moody’s

Growing “net-zero” commitments from the world’s biggest financial institutions will help drive the transition to a low-carbon economy, says Moody’s Investors Service in a new report.

The United Nations’ COP26 climate summit produced pledges from over 450 financial firms with total assets of US$130 trillion across 45 countries, to net-zero financed emissions by 2050.

If those firms follow through, “it will increase pressure on carbon-intensive sectors and companies without credible carbon transition strategies because their access to capital will progressively tighten,” says Moody’s.

At the same time, financial firms with high exposure to carbon-intensive sectors will face rising asset and reputational risks, the report said.

Moody’s estimated that G20 financial institutions collectively have nearly US$22 trillion in exposure to carbon-intensive sectors, which represents 20% of their total portfolios on average.

“Rising commitments from the financial sector to net-zero financed emissions indicate that shifts in financing flows toward carbon neutral or green sectors away from carbon-intensive ones will likely become an important transmission channel for credit risk,” the report said.

Conversely, the growing demand for green finance “will open vast new lending and investment opportunities for financial firms,” it said.

“In our view, financial firms that adopt a rapid but predictable shift towards climate-friendly finance will best preserve their creditworthiness as carbon transition progresses,” the report concluded.

“It will mean firms will need to integrate climate risk considerations into their strategic decisions, business processes, governance structures and risk management frameworks, while setting out clear goals for reaching net zero in financed emissions. And it would entail a shift in their business models toward lending and investing in new and developing green infrastructure projects, while supporting corporates in carbon-intensive sectors that are pivoting to low-carbon business models.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.