Despite shifting government policy, U.S. banks can’t ignore the reality of climate-related risks, says Fitch Ratings.
In a report on Thursday, the rating agency said that while the current U.S. administration is rolling back climate initiatives — such as efforts to improve the disclosure and oversight of climate risks adopted over the past few years — climate-related risks remain relevant to banks and their credit quality.
“Extreme weather and decarbonization dynamics are enduring drivers that can affect operational resilience, credit performance and business models,” Fitch said, adding that it “views ongoing investment by banks in climate risk management as prudent despite reduced near-term U.S. supervisory focus.”
To start, physical risks are intensifying, it noted.
Climate-related events that inflict at least US$1 billion in damages “have risen in frequency and severity for decades,” it said.
At the same time, transition risks will grow as the demand for power continues to increase, raising the cost of future policy shifts such as the imposition of higher efficiency standards.
“Compliance-related investments and higher energy costs could alter the credit profiles of bank borrowers. Banks may also face shifts in revenue and risk mix as sectors adapt to decarbonization and technological change,” it said.
Against that backdrop, banks that comply with climate standards in Europe or the U.K. “may be better positioned if regulators tighten policy again under a future administration,” the report said.
“Institutions aligned with more stringent international standards may have an advantage in maintaining consistency and preparedness across cycles,” it suggested, as abrupt shifts in U.S. policy complicate banks’ planning and require costly compliance adjustments.
Additionally, by improving data on existing borrowers and increasing diversification away from clients that are vulnerable to climate risks, banks could improve their credit profiles, the report said.
However, efforts to contend with climate-related risks may be hampered by degradation in the quality of public data that could “impair catastrophe modelling, push up premiums or create coverage gaps, increasing exposure to uninsured losses and adding loan-loss volatility,” it noted.