Companies investing in climate risk mitigation will reap rewards – analyst

Latin American corporates taking action to address growing risks related to climate change will have a leg up in ratings and creditworthiness over firms reacting to impacts as they arrive, according to a Moody’s executive.

In a 23-page report, Moody’s argues firms relying on fixed operating assets – such as miners, power generators, water utilities and telcos – face tightening supply chains and credit ratings pressure due to climate change, especially in Latin America and the Caribbean (LAC).

Moody’s senior vice president Barbara Mattos told BNamericas that the agency’s view on corporate ratings isn’t about exposed operations, but about how they are preparing and investing in long-term solutions to mitigate growing climate risk.

“For example, when we talk about water stress in Mexico … we think about beverage companies that have actually had to suspend new investments, because of water availability,” she said, with restrictions also straining private-public sector relations.

Likewise, “northern Chile [is] a water stress area, where companies need to operate with much more limited water availability.”

While some companies react to water emergencies and are forced to halt investments, more creditworthy ones enact “initiatives that should ensure water supply for their operations,” Mattos said.

“What companies are doing, for example in Chile … to mitigate the physical climate risk related to water stress is [making] … very large investments in desalination plants,” she added. “I think this is a very good example of thinking about long-term action.” 

She cited state miner Codelco and Minera Escondida, also mentioned in the report, as examples of successful desalination efforts. Escondida implemented the EWS water supply project and expansion.

These investments bring “benefits … on the rating, on the credit quality, broadly speaking, because, [they] reduce the operational risk of the company.”

THE RIGHT INITIATIVES

Mattos added that companies need to carefully evaluate their exposures.

For example, those with operations subject to tropical cyclone impacts and/or heavy flooding need to develop initiatives that integrate potential magnitude and frequency of such events and be prepared to restore operations as quickly as possible in every scenario.

Companies also need to be more aggressive in lowering their operational risk with the climate changing in the coming decades than the governments where their operations are located.

The Moody’s report said that while many LAC nations are developing policies and legislation to address climate change, “they are in general late on their net-zero agendas compared with peer countries.”

In LAC, the report said, “implementation of policies to phase out greenhouse gas emissions and achieve carbon neutrality will be slow, and since climate-change threats will only intensify, many sectors are adopting their own measures,” hence the region’s corporates move at their own risk on delays in deploying ESG or climate transition policies.

In Brazil, recent droughts have exposed the need for a more robust offer of electricity sources and shifting away from the 67% of national capacity now reliant on hydropower.

Yet some industries have learned to widen their territorial base to add a buffer against weather impacts.

“Changing weather patterns [are] threatening losses of crops and productivity for Brazil's agriculture and protein producers, though geographic diversification eases that risk,” the report said.

Diversification helps Mexico’s state-owned power company CFE diffuse impacts from climate and human-made disasters as well, said Moody’s.

In Peru and Colombia, scientists continue to study the role of climate change on the ENSO (El Niño-Southern Oscillation) cycle, marked by the periodic rise and fall of mid-latitude Pacific Ocean temperatures and acute weather events.

“Climate change appears to be intensifying El Niño and La Niña events,” with changes in Pacific Ocean temperatures causing strong events.

“Floods and rising sea levels both pose direct threats to Peru's fishing, protein and agriculture sectors, but other sectors less exposed to physical climate risk such as mining and tourism also face hazards from floods, water and heat stress,” said Moody’s.

Conversely, it added, “for fishing companies, a decline in anchovies hinders the production of fish meal. Weather-related events damage important crops such as blueberries and avocados for Camposol.”

The climate risks in the Andes are also impacting mining companies, including Minsur, Volcan and Buenaventura, because most of their cash flow is concentrated in Peru, Moody’s said.

While hurricanes may not have increased in frequency, data suggests they are becoming stronger while lateral movement slows, raising flood risks.

Hence, the Caribbean, Mexico and Central America are all facing increasing risk from hurricanes, along with sector-specific threats, Moody’s said. Conversely, telecoms like Millicom International Cellular in Guatemala and ATP Tower Holdings’ have spread operations in Colombia, Peru and Chile, which is helping to mitigate these threats through geographic diversification.

The report’s physical risk heat map shows red-flag areas like the exposure of Colombia and Peru to increasingly unpredictable oceanic heat cycles, while Brazil faces persistent fire risks in the northwestern Amazon rainforest.

Banks that back at-risk firms are facing more limited exposure, but some need to better assess impacts climate change has on their investment portfolios, Moody’s said.

Peruvian banks, however, already have a “well-balanced distribution of loan operations with no particular high-risk concentrations of physical climate risk exposure,” and unlike agri-business dependent Argentina, “Chilean banks are intensely aware of physical climate risks to the country's low-lying coastal areas and drought and desertification elsewhere in Chile, and keep their loan books diversified, with little overall exposure to agribusiness and mining borrowers.”

Though less at risk than the sectors Moody’s lists, LAC banks increasingly have to recognize how their creditworthiness is tied to industries that rise and fall with extreme weather events.

The report added that even with good climate-transition policy deployment, some risks will unavoidably increase.

“Chile pursues clean transportation, energy efficiency, renewable energy, selective land use, and climate-based management of water resources,” said Moody’s. “Even so, water scarcity has escalated, complicating operations for mining, agriculture and hydropower generation.”

“Mining operations also face risks from increased precipitation and rising sea levels, while extreme temperatures threaten workforce productivity and electrical infrastructure,” it added.

Pictured: Deforestation in Colombia