Credit ratings have yet to effectively capture energy transition risks facing European oil and gas sector
Key Takeaways:
Providing a long-term view for oil and gas companies would help credit rating agencies better rate the uncertainties caused by the energy transition.
A long-term rating approach for the European oil and gas sector should cushion against credit events that may cause ratings to rapidly fall and impact cost of debt and access to funding.
Credit rating agencies’ focus on assessing the scale of hydrocarbons should be replaced with a revenue measure to consider diversification into businesses that fall outside the scope of oil and gas value chains.
Credit raters have been developing tools to assess climate transition plans, but these assessments remain separate from credit ratings.
13 March 2025 (IEEFA) | Credit rating agencies’ relatively short rating horizons limit the consideration of the long-term climate-related risks faced by European oil and gas companies, according to new research from the Institute for Energy Economics and Financial Analysis (IEEFA).
The report calls on rating agencies to reasonably adapt their approach by offering a longer view of the European oil and gas sector, which would help them more systematically rate the uncertainties caused by the energy transition.
“Often limited by their relatively short horizon, credit ratings find it difficult to account for the risk of the oil and gas sector’s long-term decline, given the unclear timing and magnitude of the downturn,” said Kevin Leung, author of the study and a sustainable finance analyst at IEEFA.
“Simple steps can lead to ratings with a longer forward-looking view, which are more likely to align with investors’ horizons and in turn help investors anticipate future risk-adjusted returns and make more informed decisions.”
The report finds that a long-term view for the European oil and gas sector should cushion against sudden, drastic credit events that may cause ratings to rapidly fall from investment grade and impact cost of debt and access to funding.
Under credit rating agencies’ oil and gas methodologies, proven reserves indicate a company’s future revenue viability and are a key determinant of credit strength. But this is likely to become less relevant as reserves are increasingly subject to stranded asset risk under various climate scenarios.
“Credit rating agencies’ overriding focus on assessing the scale and diversity of hydrocarbons in oil and gas sector ratings appears to be increasingly unfit when taking a long-term view,” said Leung.
The research instead calls on agencies to introduce a revenue measure to better reflect the scale of a company overall and consider the contributions of its non-fossil fuel businesses.
As rating agencies’ qualitative approach to the oil and gas sector does not clearly consider business activities outside the sectoral scope and competition from low-carbon technologies, the report suggests a dedicated energy transition factor should be incorporated into the sector criteria.
The report also finds that raters have developed tools to assess climate transition plans, but these remain separate from credit ratings. As oil and gas companies’ transition planning may have increasing credit implications, integrating elements of these assessments into credit ratings would provide a relevant, long-term view.
“Updating rating agencies’ methodologies could be taken one step at a time to avoid an overhaul,” said Leung. “By improving their methodological approach, rating agencies could better outline how ratings may change due to the energy transition, in turn helping bond investors make informed decisions.”
Read the report: https://ieefa.org/resources/european-oil-navigating-credit-risk-towards-net-zero
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The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. www.ieefa.org
