With 46 straight days of 100-degree heat and coastal waters approaching hot-tub temperatures, Miami can seem like a clear example of the costs of a warming world. But analysts at S&P Global Inc. aren't sweating it.
They recently
As the world reels from the mounting impact of heat waves, droughts and fiercer storms, there is growing concern that credit rating analysts are misreading climate risks in the $133 trillion global bond market, to the detriment of creditors and borrowers alike.
The government-sponsored enterprise's chief executive managing the issue is looking at how things like roof pitch can mitigate the impact of natural disasters on homes.
Research by the European Central Bank shows that even when climate variables are statistically significant, they play only a marginal role in
Climate change has "yet to be hardwired into the methodology" currently used by the biggest ratings companies, said Moritz Kraemer, who oversaw S&P Global's sovereign debt ratings until 2018 and is now head of research at Germany's LBBW Bank.
It's only 15 years since S&P, Moody's Investors Service and Fitch Ratings famously misjudged the subprime mortgage market that triggered the 2008 financial meltdown. Now, they're under fire for potentially underestimating potential climate losses in a rating system more tuned to the near term.
S&P, Moody's and Fitch say they do account for climate risks, though it isn't an easy calculation. Since the start of 2022, S&P has published five climate-related ratings actions on non-financial companies. It says climate regulations have yet to bite and most companies' net zero spending isn't big enough to affect financials or ratings.
S&P Global said it evaluates the impact of ESG credit factors for its debt ratings. These factors include climate transition and physical risks, health and safety, and risk management. They can impact a rating if they're deemed to be material to creditworthiness and if S&P can measure their impact with enough certainty, according to a company spokesperson.
At Fitch, climate change and other environmental risks have affected about 6% of its ratings, though it expects that to change within the decade. Some 20% global corporations may face ratings downgrades by 2035 due to climate vulnerabilities, according to Fitch estimates.
The tool, which includes overlays for industry metrics like delinquencies, could be helpful to policymakers trying to size up the cost of natural disasters affecting properties.
Moody's estimates that sectors facing high or very high environmental credit risk now account for $4.3 trillion in rated debt, a figure that's doubled since late 2015. But when
A Moody's spokesman said the company "systematically, consistently and transparently" incorporates credit-relevant ESG factors, including climate risks, into its ratings.
Credit rating companies need to move more swiftly, said
Agarwala, his Cambridge colleague
For example, if climate risks were properly calculated under a conservative, low-emissions trajectory, 58 sovereigns would experience "downward pressure" on ratings by 2030. Chile and India would be among the worst hit. The affected countries' annual interest payments would rise by as much as $67 billion under the moderate scenario, and up to $203 billion under a more extreme scenario.
Central bank researchers, meanwhile, worry that a climate shock could tip a vulnerable sovereign issuer into default.
"Extreme weather restricts governments' ability to issue debt," Mallucci said. And "extreme weather events and natural disasters are poised to become even more sizable in the coming years."
As for the $3.8 trillion US municipal debt market, Tom Doe, president of the research firm Municipal Market Analytics Inc., said that as far as he knows, "no US municipal issuer's credit rating has been changed because of climate change risk."
In a report
BlackRock Inc., Schroders Plc and other investment managers aren't waiting for the ratings industry to catch up. They're already designing products or selecting bonds based on climate risks that aren't always captured in credit scores.
Saida Eggerstedt, head of sustainable credit at Schroders, recently declined to buy a green bond issued by Alliander NV, a Dutch electricity distributor. Moody's rated the issue Aa3, but Eggerstedt was turned off in part because the firm lacks public climate targets and has a relatively high carbon intensity. "You can get frustrated when long-term, non-financial impacts aren't reflected in credit ratings," she said.
In 2020, BlackRock
Such products "meet the growing interest from clients to mitigate risk and capture opportunities associated with climate and the transition to a low-carbon economy," said Manuela Sperandeo, global head of sustainable indexing at BlackRock.
S&P, Moody's and Fitch all acknowledge that climate change is likely to have a material impact on debt markets. The question is when —and whether the ratings will capture it before it's too late.
Alex Griffiths, head of EMEA corporate ratings at Fitch, said that "if you go out even 15 years, we know very significant things are likely to be happening."