Accelerating the race to reduce carbon emissions to net zero will increase credit risks and the cost of doing business for large emitters, according to a leading rating agency.

More financial institutions will commit to change this year, creating significant momentum for capital to move away from greenhouse gas-emitting activities that are not aligned with a net zero strategy, warned Moody’s Investors Service in a report.

While Australia sticks to its current 2030 target and has yet to officially commit to net zero emissions by 2050, many governments are now focusing on more ambitious reductions this decade to achieve the net zero by mid-century or earlier.

Moody’s expects more pressure on major producers and users of fossil fuels to adopt credible transition plans and open their accounts to further scrutiny under stronger governance regimes.

The Glasgow Financial Alliance for Net Zero initiative pursues a critical mass of significant net zero commitments in the financial sector, and regulators are already agreeing to new climate-related disclosure requirements.

Australia’s prudential regulator last week released draft guidelines for banks, insurers and pension trustees on managing climate change financial risks.

Moody’s expects more financial institutions to adopt net zero ahead of the UN climate talks in Glasgow later this year, after the United States changed course under the Biden administration.

“These financial sector initiatives, if followed, will require significant changes in portfolio investment and lending practices by the end of the decade for those who are signatories to them,” said James Leaton, vice president senior at Moody’s.

He expects the impact to be greater than the implementation of the previous patchwork policy, gradual changes in disclosure requirements, or the funds’ voluntary measures to reduce oil and gas holdings.

Movements in the financial sector already include the Alliance of Owners of Net Zero Assets of 37 institutional investors with $ 5.7 trillion (AU $ 7.4 trillion) under management, including Australia’s QBE, pledging to move their investment portfolios to net zero emissions by 2050..

The Net Zero Asset Managers Initiative is a group of 87 asset managers with $ 37 trillion (AU $ 49 trillion) under management.

A Net Zero Banking Alliance, comprising 43 global banks, has also made commitments.

The United Nations estimates that 121 countries, 23 regions and 509 cities – representing 68% of global GDP – have now committed to decarbonization.


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