LONDON: 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 (IEEFA).
From within the big three credit rating companies – Moody’s Investors Service, S&P Global Ratings and Fitch Ratings – warnings have already been issued, but these have gone largely unnoticed, IEEFA, a US-based non-profit organisation, said.
Inside the industry, “alarm bells have been sounding for months,” said Hazel Ilango, an energy finance analyst focused on debt markets at IEEFA.
In June, S&P warned that climate change is becoming a “significant” driver affecting credit worthiness but IEEFA acknowledged that “few climate-related rating actions” had taken place since early 2022.
Fitch has warned that about 20% of corporate companies face downgrades due to climate change, while Moody’s has said that credit risks linked to environmental, social and governance factors are rising.
But the warnings went largely unheeded, which “is concerning”, Ilango said.
According to IEEFA, failure to gradually reflect the impact of climate change in credit ratings will expose issuers to bigger, sudden losses further down the road.
The warning comes amid extreme weather in North America, Europe, Asia and Africa afflicted by everything from floods to droughts to wildfires.
The gap between the reality of climate change and the risks currently reflected in credit ratings “could result in multi-notch downgrades and trigger sweeping bond selloffs,” Ilango said.
In a recent analysis of an orderly energy transition by 2050, S&P Global Market Intelligence found that companies in airlines, automotive, metals and mining, oil and gas, and power generation, faced a 31% to 54% downgrade risk. — Bloomberg
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