In its outlook for 2024, rating agency Moody’s Investor Service has come out with six environmental, social and governance (ESG) trends that will be seen this year and beyond.
Green technology and disruptive innovation will increasingly drive investment and business decisions in sectors most exposed to carbon transition, but lacklustre economic conditions and geopolitical strains will pose hurdles to net zero ambitions.
Businesses and financial institutions will navigate a complex ESG policy landscape, with mandatory climate and sustainability disclosures coming into effect in several jurisdictions, regulatory focus on greenwashing, and a busy election calendar that could result in climate policy shifts and amplify social tensions.
Rising physical climate risks will cause mounting economic and financial losses for governments and businesses, and make insurance more expensive or unavailable in some markets, highlighting the need for investment in adaptation and resilience.
But the climate finance gap in emerging markets (EMs) will remain an obstacle, even as efforts to mobilise private finance could start to bear fruit. Growing focus on environmental degradation will pose regulatory, litigation and market risk for businesses with high exposure to natural capital, and waste and pollution risks. And factors such as carbon transition, population aging and artificial intelligence (AI) will start to reshape the future of work, with social and economic ramifications.
Credit risks and opportunities for carbon-intensive sectors
Strong policy support, market momentum and growing cost competitiveness of mature clean energy technologies will buttress green capital spending in 2024 in major markets and accelerate the pace of carbon transition in key economic sectors. This includes the US where the Inflation Reduction Act (IRA) is providing substantial financial incentives for investments in mature clean energy technologies such as renewables and battery electric vehicles (BEVs), and emerging green solutions such as green hydrogen and carbon capture, utilization and storage (CCUS).
While transition is underway in both the auto and power sectors amid the rapid adoption of BEVs and renewables, the auto sector is facing greater obstacles in meeting the pace of transition demanded by policymakers in major markets. For example, the EU and the US state of California have put restrictions on the sale of new internal combustion vehicles starting in 2035. In the power sector, the shift to renewables is resulting in lower realized prices for merchant renewable power projects and greater difficulty in hedging prices.
Demand risk for oil & gas sector
For the oil and gas industry, the pace of transition in the transportation and power sectors highlights growing demand risk. Some rated integrated oil companies are investing in green diversified businesses such as green hydrogen and electric vehicle charging infrastructure, but is unclear which of these approaches will be profitable. In addition, many companies have recently reduced green transition spending and increased long-term investments in hydrocarbons. Actions to decrease emissions from operations, such as investment in CCUS technology, do not reduce exposure to declining demand under a rapid transition scenario.
In hard-to-abate sectors where low-carbon technologies are not available at scale – including steel, shipping and aviation – policy support for emerging green technologies including green hydrogen, biofuels and CCUS is fueling growing private and public investment, and creating fresh credit risks and business opportunities. For example, the IRA in the US aims to rapidly reduce costs and demonstrate scalability of these technologies to accelerate adoption through a range of subsidies and demonstration projects.
