Covid has "stalled but not derailed" the transition to low carbon says Fitch

The covid pandemic has “stalled but not derailed” the transition to low carbon creating a longe-term increase in credit risk for utilities according to research findings from credit rating agency, Fitch Ratings.

In its report, The Next Phase: Corporate Credit Risks Shift as Pandemic Amplifies Secular Trends Fitch said the coronavirus pandemic is “accelerating digital transformation and supply-chain shifts but has stalled the move to a low-carbon economy.”

Across all industries Fitch said the impact of covid on global low-carbon ambitions will “become a material credit risk in the long term,” with regulatory shifts and capex intensity as the drivers associated with the low-carbon transition for most corporate sectors.

Fitch found that volume of debt that will be highly exposed in the long term to the carbon transition was significantly greater than for digital transformation and supply chain shifts. This, it said, was because of the size of two of the most exposed sectors – oil and gas and utilities – and their debt loads>

Fitch said, over the “next few years” the trends in each of these three areas would – to varying degrees – up credit risk in every corporate sector reviewed faced an on six key credit drivers:

industry structure,

growth trajectory,

operating efficiency,

regulatory shifts,

capex intensity and

financing availability.

Fitch said the acceleration in digital transformation would arise as sectors aim to meet objectives in “safety, operational resilience and supply-chain recalibration.” In the utilities sector, according to the Fitch report, “incumbents with an ability to embrace and execute digital models can consolidate market share in sectors.”

And consumers’ shift to greater adoption of e-commerce and online activity will add to the impact on credit profiles from digital transformation. Operational efficiency, according to Fitch will be “the credit driver most widely affected.” It added: “Regulatory shifts are also notable as oversight intensifies.”

On digital transformation Fitch said, “We do not expect the pandemic to have a material impact on the pace of digital integration in sectors such as autos and utilities. While digital transformation may be central to their development, the pandemic has not transformed the way in which they deal with customers or exposed business-model vulnerabilities that would otherwise accelerate the trend.”