“Aside from a broadly worded agreement to establish a loss and damage fund for poor countries most vulnerable to climate change, there was a lack of new major pledges," it said.
According to the credit rating agency, the initiatives announced at the climate summit to make progress on existing commitments will increase carbon transition risk for certain highly exposed sectors. Mobilizing climate finance for emerging markets, such as through loss and damage financing and ramping up investment in adaptation and resilience measures, also took center stage.
Without significant and effective adaptation, emerging market sovereigns will face significant economic and fiscal losses stemming from climate change. The ultimate credit impact of the announcements made at the summit will be determined by how and when policymakers and market participants translate them into action.
Although participating countries had committed to revisiting their emissions reduction pledges after last year’s UN climate summit (COP26), only five countries – Australia, Norway, Singapore, United Arab Emirates and Thailand – strengthened their targets in advance of this year’s conference. The summit’s final cover text also excluded a commitment to phasing out all fossil fuels.
“As a result, global commitments remain well short of what will be needed to limit global warming to 1.5 degrees Celsius above preindustrial levels. Given the large gap between existing commitments and stated policies, any meaningful progress on pledges will increase credit pressures on sectors and entities with high inherent exposure to carbon transition risk," Moody’s said.
For example, implementation of the Global Methane Pledge to reduce methane missions by 30% by 2030, is likely to raise compliance and operating costs for oil and gas companies. Similarly, the US and Norway’s launch during COP27 of a Green Shipping Challenge to reduce greenhouse gas emissions in the shipping industry could increase policy and market risks for companies in the sector.
“At the same time, a number of new initiatives could help accelerate technological innovation and reduce decarbonization costs for companies in high-emitting sectors. For example, the First Movers coalition announced $12 billion in purchase commitments by 2030 to help create early markets for low-carbon technologies across eight hard-to-abate sectors, such as cement and steel," the report said.
“These efforts complement public sector initiatives under the so-called Breakthrough Agenda, through which governments representing more than 70% of global GDP have agreed to make low-carbon technologies, such as hydrogen, more affordable," it added.
Meanwhile, 86 asset managers announced new initial targets under the Net Zero Asset Managers initiative, increasing the total number of asset managers with net zero targets to 291, representing more than $66 trillion in assets under management.
As more financial institutions and nonfinancial companies start to implement net zero targets, companies with high exposure to transition risks that do not lay out credible targets and transition plans will risk seeing their cost of capital rise and demand for goods and services fall. This trend could accelerate as disclosure requirements take effect in major jurisdictions and data availability improves, Moody’s said.
Coalitions focusing on data availability, transparency and accessibility continued to drive efforts at COP27 to improve and standardize disclosures. For example, the UN-backed service provider body Future of Sustainable Data Alliance released a report identifying data points most critical to corporate and sovereign sustainability disclosure and analysis, it said.
