S&P Warns of Climate Risks to Financial Sector

By Andrea Vittorio

May 5 — Standard & Poor’s Ratings Services says it will take a closer look at how banks, insurers and asset managers are preparing for the impacts of climate change.

The ratings agency has come up with a set of indicators that it will use to identify who in the financial sector is likely to be hardest hit by climate change and which companies are more likely to gain from the shift to a low-carbon economy by getting involved in green finance and investing or otherwise beefing up their green credentials.

“We expect that, over time, climate change may have the potential to materially affect the credit profiles of some financial services companies,” S&P analysts wrote in a report released May 4.

The report said climate risks to the industry could manifest in different ways—through bad loans, devalued fossil fuel assets or more frequent claims on insurance. Regulatory pressure, reputational concerns and possible legal challenges from activists could pose even greater threats than the direct costs of climate change, it said.

Climate and Credit Ratings

S&P has already examined climate risks to sovereign and, more recently, corporate credit profiles.

“At the end of last year, we did a lookback over the previous two years of all our global rating actions to see how much climate risk and environment risk has actually impacted credit ratings,” Michael Wilkins, S&P's global head of environmental and climate risk research and one of the authors of the report, said May 4 at an event hosted by Bloomberg.

The ratings agency identified about 300 examples where those risks had a material impact on corporate credit analysis and almost 60 cases where it led to rating actions, most of which were downgrades.

“We expect that to increase over time,” Wilkins said.

Risks Difficult to Quantify

Climate risks to the global economy are being talked about more often, including among financial regulators. But S&P’s report said “it remains difficult to quantify the potential impact” based on current disclosures, which tend to use boilerplate language and focus more on carbon emissions than wider climate impacts.

A task force set up at the end of last year by the Financial Stability Board, an adviser to the Group of 20 nations, is looking to improve climate-related financial disclosures with a set of voluntary guidelines due out at the end of this year.

Michael Bloomberg, founder and majority owner of BNA’s parent company Bloomberg LP, chairs the panel. Wilkins is also a member.

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com