Introduction

Our long-term issuer credit ratings do not have a predetermined time horizon. However, our rating outcomes typically allocate a higher weight to our expectations over the next several years (including specific financial forecasts for the next two to three years), within which there tends to be a larger amount of certain and actionable information. As projections extend beyond the medium term, judgements about the ability to identify relevant credit drivers, how they will shift, and ultimately their effects on credit quality becomes more challenging.

Nevertheless, we believe it is important to monitor long-dated risks because, while these megatrends may be slow moving, they can transform industries and business processes in fundamental ways. These megatrends can also trigger acute credit events that can have near-term ratings impacts.

Therefore, in this article we outline some long-dated megatrends that are likely to endure over the coming decades and impact various North American corporate sectors. They are: (1) growth in artificial intelligence, (2) vulnerability to cyberattacks, (3) increased adoption of blockchain and digital assets, (4) climate change (transition and physical risks), and (5) supply chain disruptions.

The objective is to contrast and highlight the different ways that various sectors might be affected by these megatrends. In most cases, our risk expectations remain well short of imminent rating actions. However, while the impact across an entire sector may be muted, it is not uncommon for a specific company to already be affected by an oncoming trend.

These findings are not used directly in our base-case analysis; instead, they are helpful in identifying patterns and areas for further monitoring, investigation through scenario analysis, portfolio reviews, and other analytical methods.

We summarized our industry perspectives in a heatmap (chart 1), which considers longer-term risks and opportunities from these global risk trends. (We elaborate on how we provide an overall view of how the megatrends may influence credit quality on a continuum of positive, neutral, some risk, and more risk in the next section.)

These risk assessments are largely qualitative and are intended to facilitate cross-sector comparisons within a given risk category. Comparisons across risk categories within the same sector are directional, may differ based on our current forward-looking view of credit transmission channels in North America, and are not meant to capture the absolute level of future ratings risk.

Chart 1

We have published three additional in-depth commentaries with our industry perspectives (chart 2).

• Evolving Risks In North American Corporate Ratings: Supply Chain Disruption, Oct. 29, 2024
• Evolving Risks In North American Corporate Ratings: Artificial Intelligence, Cyberattacks, And Blockchain, Oct. 29, 2024
• Evolving Risks In North American Corporate Ratings: Climate Change, Oct. 29, 2024

Chart 2

Assessing Potential Credit Impacts Of Megatrends

We identify the potential magnitude of megatrends such as disruptive technology, climate change, and vulnerable supply chains. We then assess how clearly we can see these risks evolving into credit factors based on specific transmission channels--the means through which a certain potential credit risk driver affects creditworthiness net of mitigating factors. For example, transmission channels for climate transition risk would be lower revenues as customers gravitate to a greener product, or higher costs as a government imposes regulation or taxes on emitting companies.

This process prepares us to incorporate these risks into our ratings as they become more visible and therefore material credit factors that may have rating implications (chart 3).

Chart 3

We assessed the potential impact of each of the megatrends on key sectors and provided our view on how they may influence credit quality on a continuum of positive, neutral, some risk, and more risk to create our heatmap. These categories reflect the combination of our sense of the magnitude of the megatrend combined with the clarity with which we can see the megatrends potentially affecting credit quality in the future.

In chart 4, the risk and opportunity assessments correspond to the arced areas within the quadrants.

Chart 4

Positive  A positive assessment reflects our view that the magnitude of the megatrend could have positive credit implications in a given sector. This would include competitive advantages unlocked by the development of the megatrend or the introduction of new sources of revenues because of new customers or products.

Neutral  In the case of a neutral assessment, we view the magnitude of the credit risk or the potential benefits from a megatrend as immaterial or very low. Alternatively, we would also assess a sector as neutral if the benefits and risks offset each other within contained subsectors. All cases in which clarity on how the sector will be affected is deemed too low will be categorized as neutral.

Some risk  We view sectors with some risk as those where we have some level of clarity as to how related megatrends may potentially affect credit quality. However, the megatrend may be somewhat less significant or the identified transmission channels are less clear. We would expect that sectors in this category might need some adaptation and resilience investment, but that the megatrend is less likely to be transformational. While certain companies may do better than others, we wouldn't expect a drastic impact on the sector.

More risk  An assessment of more risk reflects our view that the magnitude of the megatrend could have a significantly negative credit impact. Such sectors would be associated with business models that would need to adjust to remain profitable as a megatrend takes hold. This may mean rising costs, waning demand as substitute products enter the market, or higher regulatory scrutiny.

Artificial Intelligence

Why it matters

AI-related risks and opportunities have the potential to materially affect creditworthiness or alter the trajectory of the credit factors underpinning our ratings (chart 5) due to the potential to replace, transform, and regenerate human work and digital processes. This has the potential for significant efficiency and productivity gains, higher revenue streams, and enhanced competitiveness.

Chart 5

Transmission channels

The credit transmission channels through which AI can affect key credit factors include competitive position, revenue, expenses, investment needs, access to funding, and the impact from AI-focused regulatory developments across regions. Those channels align to fundamental issues, including energy usage, labor capital, and economic competitiveness.

Potential credit impact

Increased business risks linked to AI could result from disruptions to business models (a risk that increases with time) and the possibility that products or services will be displaced by AI or AI-driven entrants. Risks could also arise from unintended operational, financial, or reputational events stemming from malfunctioning AI systems, cost-overruns related to AI's development, the emergence of novel cyber security related vulnerabilities, or other deliberately malicious acts.

We could consider the negative impact of such risks on creditworthiness, even where their effects are unlikely to be severe in the next 12-24 months, so long as there is a high level of clarity and certainty about the materiality of the eventual impact on transmission channels. That could result from AI-related inactivity that reduces an entities' competitiveness (notably due to an AI-technology gap to rivals), or where AI projects are characterized by poor governance or weak data privacy, and are thus a threat to customer, public, or investor trust.

Positive credit implications due to AI will typically arise in sectors where we anticipate the technology will deliver stronger product or service differentiation, favorable shifts in competitiveness, and where we expect effective management can avoid technical pitfalls--including hallucinations (where AI generates incorrect information), exacerbated bias (where algorithms contribute to unfair discrimination), and risks associated with data privacy and cyber security.

Cyberattacks

Why it matters

The level of cyber risk continues to increase year over year, with the impact of the risk borne by affected entities and their customers. We view cyber risk as the risk of a compromise to the confidentiality, integrity, or availability of an entity's information assets. This could be in the form of a data breach or service interruption. We define information assets as any software, data, or information technology hardware that contribute to the entity's activities and operations. Information assets can be owned by the entity or provided by a third-party.

Among other factors, cyber risk is influenced by the types of data processed, with organizations that process sensitive personal and financial data facing higher levels of risk. Since levels of cyber risk continue to increase, we believe organizations face an increasing burden to take measures to mitigate the impact of a potential incident. Organizations that invest time and money into improving their cybersecurity can reduce the probability of an incident or of having materially negative consequences if an attack occurs. We view cybersecurity as the actions an entity takes to measure or reduce its cyber risk.

Transmission channels

A cyberattack could impact a company's reputation, potentially leading to a loss of customer confidence and business opportunities. This could directly impact revenue.

Additionally, a successful cyberattack could affect operating costs as the company recovers, including investments to upgrade assets. Depending on the length and extent of a cyberattack, business disruption could also affect a company's financials.

Potential credit impact

Corporate sectors that we view as having more risk include those with extensive use of payment processing systems and personal financial data (such as retail and restaurants), valuable IP (pharmaceuticals), sensitive personal data (health care), and infrastructure and control system attacks (telecoms, technology, utilities).

In our view, industries with less risk of cyberattacks tend to have comparatively lower value-added, commoditized products, or IP-related risk, and generally limited reliance on high-end technology and lower public network touchpoints. Real estate, chemicals, and metals and mining are examples of such sectors.

Though we view a sector as more or less at risk of a cyberattack, the likelihood of a rating impact would also depend on the severity of the cyberattack, as well as the effectiveness of management's mitigating actions and recovery plans.

Blockchain And Digital Assets

Why it matters

Some of the entities we rate are using blockchain technology to address credit risks and operational challenges. Blockchains provide decentralized network solutions and information ownership and security tools that can help to mitigate some of the risks from AI adoption and cyber vulnerabilities.

Transmission channels

Blockchain technology may affect credit ratings through shifting competitive dynamics, creating operational and cost efficiencies, and addressing security risks. Competitive landscapes may be disrupted where decentralized platforms can disintermediate some activities, and where incumbents that materialize benefits from blockchain technology gain an advantage over competitors.

Potential credit impact

The adoption of blockchain technology is still in its early days, and its effect on credit ratings will not be immediate. Therefore, we currently view blockchain and digital assets as neutral to credit risk across corporate sectors.

In our view, the most visible impact will be in offsetting some of the risks related to AI and cyber described in earlier sections of this report. Specifically, we believe health care and media and entertainment sectors could eventually benefit from blockchain as a way to mitigate potential AI and cyber risk.

Climate Change: Transition Risk

Why it matters

Climate transition risks include policy, legal, technology, and market changes related to efforts in transitioning to a low-carbon economy. Higher climate transition risk could occur if we expect regulations or technologies will have a direct impact on an entity or lead to the transformation of a sector, changing the overall competitive landscape.

Transmission channels

Carbon taxes can have a direct impact on costs and profitability for certain industries, or require additional clean investments, with potential indirect costs for customers. Greater coverage and cost of such regulations could be a significant credit transmission channel.

Regulations can also stimulate the development of certain technologies or restrict the use of existing technologies. This could change the shape of affected sectors and the competitive position of individual companies. Manufacturers of more mature transition technologies could also benefit from such regulations.

Potential credit impact

Structural changes in sectors that affect demand or pricing could ultimately impact revenues, both positively and negatively. Meanwhile increases in carbon taxes and prices of raw materials and energy could impact costs. Both factors could ultimately impact earnings if costs cannot be passed through.

Where changes in regulations or technology trends lead to higher costs or require new investment, funding and leverage could become material credit factors. Creditworthiness could be affected when there is sufficient clarity on how changing regulations and technologies will affect individual companies or a given sector.

Those sectors that contribute more to greenhouse gas emissions or could be directly affected by new regulations and policies--such as oil and gas--are more exposed to climate transition risk. Higher risk sectors could face future credit impacts from changes to their market conditions, resulting in heightened potential for stranded assets or the need for diversification.

Hard-to-abate sectors that could require new investments to meet regulations also face risk, as do those where clean technology trends could result in disruption. This could affect sectors such as automakers, metals and mining, and real estate, where capital investments could be needed to fulfil regulatory demands or remain competitive within their value chains.

Climate Change: Physical Risk

Why it matters

Physical climate risks stem from the increasing incidence and severity of climate hazards such as storms, floods, and wildfires. These may be acute isolated events or chronic risks that develop over the medium to long term, including changes to precipitation and temperature patterns, as well as sea level rise.

Transmission channels

Physical climate risks can impact the credit factors of a company or sector in different ways. For example, acute risks--like storms or flooding--can damage assets and cause business disruption, including to supply chains, while chronic risks may increase operating or capital costs.

Emissions are already locked in, with little divergence until about 2050. The implication is that entities will continue to face worsening climate hazards in the coming decades, and certainly before the middle of this century, regardless of efforts to limit greenhouse gas emissions. From about midcentury--and as policies to reduce greenhouse gases are rolled out--warming trajectories in each scenario may diverge. This will influence the extent of warming and the frequency and severity of climate hazards attributed to man-made warming. This reflects the relative impacts of policy choices taken now and in the short term.

Potential credit impact

Creditworthiness could be affected when there is sufficient clarity on how physical climate risks will affect individual companies or a given sector. For example, capital is destroyed when acute risks--such as storms and flooding--materialize, and productivity is impaired when chronic risk events--such as heatwaves or droughts--occur. These types of acute physical risks have direct impacts on a company's operating costs. It can damage infrastructure and assets and cause operational disruption.

Physical climate risks also can indirectly affect companies through supply-chain disruptions and resulting short-term inflationary pressures; reduced access to capital; and higher cost of debt. Furthermore, physical climate risks can affect demand indirectly by eroding wealth levels (such as when real estate value drops), inflationary pressures (like food shortages caused by drought), and changes in the geographic distribution of economic activity (for instance, due to tourism moving elsewhere).

Worsening climate hazards are increasing the need for investments in adaptation and resilience, but progress on adaptation varies (see "Risky Business: Companies' Progress On Adapting To Climate Change," April 3, 2024).

Long-term relative losses in market shares and income levels could materialize where the impacts of climate hazards cannot be prevented. In situations where there is no climate adaptation or where there are limits to adaptation--such as inability to avoid sea-level rise due to economic and physical limitations--productive capacity is likely to weaken the most (see "Is Climate Change Another Obstacle To Economic Development?", Jan. 16, 2023). This could also result in policy changes that may affect asset value. For example, there may be areas where construction is prohibited due to flood risk.

Supply Chain Disruption

Why it matters

A supply chain involves processes that connect raw materials, components, and goods and services before their final sale to end consumers. The chain will typically involve logistics operations, IT systems, procurement, distribution, and management functions.

Disruptions to the supply chain can increase business costs and prices for consumers and lengthen the cash flow cycle for corporate entities.

Transmission channels

Shortages of key inputs, transportation bottlenecks, or heavy supplier concentration can increase costs without enough visibility to price in changes. Inputs sometimes hit periods of shortage and price spikes, and capacity solutions emerge from investments in other industries like commodities, technology, or transportation.

Tariffs, non-tariff barriers, sanctions, and conflicts can also restrict access to inputs and increase costs in uneven ways for unpredictable timeframes. The effects of geopolitical risk can range from the imposition of tariffs that shift the economics of established supply chains to sanctions and military action that deny access to supply-chain elements. Such tensions can also come with other supply-chain risks such as asset seizures and sabotage, including through state-backed cyberattacks (see "Cyber Threat Brief: How Worried Should We Be About Cyber Attacks On Ukraine?", Feb. 22, 2022).

Labor availability appears to be constraining output in some sectors, as skilled and experienced workers retire faster than the next generations can replace their productivity.

Potential credit impact

Supply chain disruptions can affect credit quality through missed revenue, higher costs for substitutes and logistics, lower cash flow from a longer cash cycle, more debt to fund working capital, and reduced operating and financial visibility.

At the same time, disruption and higher costs in some industries can deliver above-trend revenue growth and stronger earnings for other companies. These situations test the competitive balance between buyers and suppliers and can affect key rating factors like market position and efficiency.

Related Research

• AI And Crypto Will Shape The Future Of The Internet, Oct. 1, 2024
• White Paper: Scenarios Show Potential Ways Climate Change Affects Creditworthiness, July 25, 2024
• Credit FAQ: AI Bots Are Here, So How Will Customer Experience Outsourcers Cope?, July 17, 2024
• White Paper: Assessing How Megatrends May Influence Credit Ratings, April 18, 2024
• Risky Business: Companies' Progress On Adapting To Climate Change, April 3, 2024
• Supply Chain Risks: A Credit Perspective, Oct. 17, 2023
• Is Climate Change Another Obstacle To Economic Development?, Jan. 16, 2023
• Cyber Brief: Reviewing The Credit Aspects Of Blockchain, May 5, 2022