Climate disclosures will help identify risk but increase scrutiny, says Moody’s

Increased global transparency and standardisation will improve the ability to analyse climate risks and opportunities, but some entities will face heightened risks from greater regulatory and market scrutiny, according to Moody’s Ratings. It said standardisation and comparability will be key in insuring disclosure is useful.

“Growing disclosures will raise reputational – and potentially financial – risks for companies in high-risk sectors perceived as taking too little action to address exposure, or seen as overstating green credentials. Also, in many jurisdictions, disclosures for small unlisted companies will remain a blind spot,” said Moody’s.

The ratings agency noted that financial regulators in a growing number of jurisdictions are mandating that companies disclose their exposure to climate-related risks, including carbon transition and physical climate risks. “Increased transparency will improve investors’ and lenders’ ability to analyse climate-related risks and opportunities, especially as requirements become more standardised globally. Greater regulatory and market scrutiny into companies’ exposure and mitigation plans may raise risks for some entities,” it said.

Rebecca Karnovitz, vice-president, senior credit officer, Moody’s Ratings, said: “Reporting companies will face compliance burden and heightened regulatory scrutiny in the short term. Many large global companies already report on climate-related risks on a voluntary basis. Reporting requirements are likely to be more difficult to implement and financially burdensome for smaller companies with limited resources. Potential for regulatory action and litigation against companies for non-compliance with disclosure requirements or perceived greenwashing will remain high as the policy landscape evolves.”

She added that multinational companies with complex values chains will face additional costs and reporting hurdles, such as difficulties in obtaining carbon emissions data from their multitude of suppliers.

Moody’s pointed to large European companies needing to comply with the EU Corporate Sustainability Reporting Directive (CSRD) starting in 2024, with most reporting beginning in 2025. Similarly, companies operating in California will be required to report their carbon emissions under the Climate Corporate Data Accountability Act (SB 253) and climate-related financial risks under the Climate-Related Financial Risk Act (SB 261) starting in 2026.

And now the US Securities and Exchange Commission (SEC) has finalised its climate-related disclosure rules, which require publicly listed companies to make certain climate-related disclosures in their annual reports and audited financial statements, although Moody’s stressed that the implementation of the rules is uncertain due to pending litigation.

Moody’s said that mandatory disclosure should support both understanding and reporting of climate-related risks for investors and lenders. It added that consistency and comparability of data will be key in insuring that required disclosures provide useful insights into the linkages between climate exposure and financial risk.

“Climate risks are not consistently well addressed among highly exposed sectors today. For example, we have found that companies with the highest exposure to carbon transition risks tend to be the least transparent regarding transition plans. Companies could face higher financing costs over time if investors and lenders deem that their mitigation strategies are insufficient,” said Karnovitz.

Moody’s noted that over time, more standardised requirements and greater reporting transparency could help reduce compliance costs as well as regulatory and litigation risks. It said reporting burdens are likely to become less onerous as standards such as the International Sustainability Standards Board become more globally accepted and implemented. Technological solutions are also likely to enhance the efficiency and credibility of data collection and analysis.