As the damaging effects of climate change become increasingly apparent, the credit implications are growing too, says Moody’s Investors Service in a new report.
The rating agency said credit consequences will follow from damaging global warming, which is now inevitable given existing emissions and their forward trajectory.
“Because of the inertia and time lag involved in how carbon emissions affect the earth’s climate, the negative effects of climate change through 2050 are largely already locked in by emissions to date,” the report said.
As a result, physical climate risk — the damaging storms, heatwaves and wildfires that can affect a wide range of credits (business and government) — is an increasingly material credit consideration, it said.
Long-term shifts in weather patterns (such as warming and rising sea levels) also represent physical climate risks, it said.
“These risks are often interrelated and can affect entities’ current and future operating strategies, increase financial volatility, lead to higher insurance premiums, and increase or accelerate the need for resilience and adaptation investment or, ultimately, relocation,” the report said.
When it comes to assessing the credit impact of these threats, the “geographic location of assets” is the primary factor in determining physical climate risk exposure, Moody’s said.
“But other asset characteristics, such as type, sector, relevance to operations, and supply chain and transportation dependencies — coupled with risk mitigants in place — also help in assessing the degree of impact that physical climate risks can have on an entity’s operations, and ultimately its credit quality,” it noted.
While climate disclosures can help investors assess these risks, Moody’s said that, at this point, these disclosures remain inadequate.
“The quality of disclosure, rather than the quantity, is important,” the report said. “But entities’ lack of consistent, detailed disclosures about their assets impedes thorough risk assessment and comparisons.”
Currently, several policy-makers — including the U.S. Securities and Exchange Commission, the International Sustainability Standards Board and the European Financial Reporting Advisory Group — are developing tougher reporting standards, including provisions that would require specific reporting on the location of assets facing material physical risks.
“However, entities may deem some information to be confidential, to have the potential to raise competitiveness concerns if publicly disclosed, or both,” Moody’s noted.
In these kinds of cases, reporting that still enables “a reasonable estimate of financial impact or other forms of disclosure may be possible,” it said.