Credit Ratings Underestimating Climate Risks

Credit ratings are failing to accurately account for climate-related risks, raising concerns among bond market participants who prioritise stability, according to research from the Institute for Energy Economics and Financial Analysis (IEEFA). Fitch Ratings warned that approximately 20% of global corporations, primarily those in the oil and gas, pipeline, and energy midstream sectors, could face downgrades by 2035 due to climate vulnerabilities. S&P Global Market Intelligence found that carbon-intensive sectors such as airlines, automotive, metals and mining, oil and gas, and power generation could experience downgrade risks ranging from 31% to 54% in an orderly energy transition scenario by 2050. Moody’s Investors Service similarly highlighted the rising credit risks linked to environmental considerations, with sectors like oil and gas, automobile manufacturing, utilities, and power generation accounting for a significant portion of total rated debt outstanding. These warnings have largely gone unheeded, the research says, potentially leading to rating volatility and instability. IEEFA proposes the adoption of forward-looking rating methodologies that account for climate risks in assessing creditworthiness. This includes forecasting future earnings and cash flow impacts from a climate risk perspective. The IEEFA report also suggests incorporating independent climate specialists into credit rating committees to enhance decision-making and align with regulatory recommendations. As climate risks intensify, the wait-and-see approach to integrating them into credit assessments becomes riskier. Experts assert that regulatory intervention is essential to ensure a sustainable and effective credit system that accounts for these challenges and safeguards bond market stability. 

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