Bond investors can’t rely on credit ratings to give them a fair assessment of the climate risk they’re exposed to, and should brace for “trouble ahead,” according to the Institute for Energy Economics and Financial Analysis.
From within the big three credit ratings companies — Moody’s Investors Services, S&P Global Ratings and Fitch Ratings — warnings have already been issued, but these have gone largely unnoticed, IEEFA, a US-based nonprofit, said in a statement on Monday.
IEEFA notes that in June, S&P warned that climate change is becoming a “significant” driver affecting credit worthiness, but acknowledged that “very few climate-related rating actions” had taken place since early 2022; Fitch has warned that about 20% of corporates face downgrades next decade due to climate change, while Moody’s has said that credit risks linked to environmental, social and governance factors are rising.
In a recent analysis of an orderly energy transition by 2050, S&P Global Market Intelligence found that companies in five major carbon-intensive sectors –- airlines, automotive, metals and mining, oil and gas, and power generation –- faced a 31-54% downgrade risk. A disorderly transition, meanwhile, would raise the credit downgrade risk by a further 2%-20%, the analysis indicated.
IEEFA says rating companies could adopt near-term and forward-looking alternatives, for example, by forecasting future earnings or impact on cash flows from a climate risk perspective. And regulators should require credit rating committees to include non-voting independent climate specialists as members.
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