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Moody's developing new rating system to assess companies' "carbon risks"

Illustration of a 5-leaf rating system in the style of an online review.
Illustration: Aïda Amer/Axios

Climate change is an enormous risk to the economy and markets. If the world manages to solve its collective action problem, investors will cheer — but, as with any major change, there will be winners and losers.

What to watch: Moody's, the ratings agency, is putting together what it calls a "framework to assess carbon risks." Individual companies will be given a carbon transition assessment, or CTA, which measures how well they'll be able to operate in a low-carbon economy.

"Issuers assigned the highest scores, CT-1 and CT-2, exhibit advanced positioning for carbon transition. These companies typically have a business model that benefits from the transition to a low-carbon economy. By contrast, companies assigned the lowest scores, CT-9 and CT-10, exhibit poor positioning and typically have business models that are fundamentally threatened by carbon transition over any time horizon, including the long term."
— Moody's Investors Service

Why it matters: Carbon transition risk is already built into Moody's existing credit ratings, but it's not a large part of those ratings, largely because it's far from clear that a major carbon transition is actually going to happen. Now that Moody's is separating out this risk into a discrete CTA score, investors will be able to get a much clearer idea of which companies are successfully positioning themselves for a green future.