Environmental Finance
13 November 2024
Swami Venkataraman, global head of sustainable finance assessments, at Moody’s Ratings, explains how independent assessments can help companies communicate their transition plans effectively.
How are companies using independent assessments on their decarbonisation plans?
This typically falls into five buckets. First, independent assessments provide a way for companies to communicate with all stakeholders about their transition plans. They enable companies to talk about their transition with investors, regulators, and customers. They can reduce concerns about greenwashing because a neutral and credible third party has looked at the plans and provided an independent opinion.
The second driver is investor communication. Many companies have a large number of investors engaging with them on their transition plans. The NZAs offer a market standard that can be well understood by market participants, thereby enabling companies to reduce the time, cost and resources spent on engaging investors on this topic. And unlike credit ratings, NZAs will be relevant to fixed income and equity investors alike.
The third area for companies is raising capital and widening the investor base. Labelled bonds are a growing part of the fixed income universe and are an important part of driving the transition, but assessments like the NZA allow issuers to explain the direction of the company as a whole. This could expand the investor base because even the non-green bonds in an investor’s portfolio are potentially open to sustainability-focused investors.
The fourth driver of independent assessments is the potential for internal feedback. Almost two-thirds of the NZAs we have carried out are non-public, with many companies using Moody’s NZA to provide feedback to their boards and senior management. Some companies obtain NZAs for multiple scenarios and use it to finalise their transition plans, others simply use it to identify strengths and weaknesses in their existing plans, especially in comparison with others.
Finally, the fifth area is specific to privately owned names. Private equity (PE) is a big part of the market and independent assessments can play an important role in their exit strategies. Whether they are seeking an IPO or a strategic sale, potential buyers or shareholders will want to know how PE-backed companies are positioned from a transition perspective. Independent assessments can also help transition-focused PE funds with reporting.
Read the full COP 29 pdf report here.