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THE BOTTOM LINE Last year,climate and weather events did
more than $300 billion of damage in the U.S. Often that risk isn’t
reflected in debt ratings.ranging from insurance to construction. The agen-
cies have looked at these risks for years and issued
reports on them, but in recent months they’ve
been working to integrate this research more into
individual ratings. In November, Moody’s warned
coastal cities and states to address their climate
risks or face possible downgrades. A month later it
issued a report highlighting 18 small islands, from
Fiji to the Bahamas, that were “particularly suscep-
tible to climate change.” S&P analysts are working
with its insurance practice on climate models and
scenario research.
In the U.S., costly natural disasters are becom-
ing more common. The National Oceanic and
Atmospheric Administration tallied 16 major,
billion dollar-plus storms, fires, and floods in 2017,
including Maria and Hurricane Harvey, which dev-
astated Houston. That compares with an aver-
age of about six a year since 1980. The weather
and climate events wreaked a record $306.2 bil-
lion of damages, NOAA said. Companies and gov-
ernments are feeling the brunt. A Moody’s study
in 2015 found roughly $9 trillion in rated debt
exposed to environmental issues such as pollu-
tion, carbon regulation, water shortages, and nat-
ural disasters. In a recent review of its research,
S&P found 717 cases from mid-2015 to mid-2017 in
which environmental and climate concerns were
factors in corporate credit ratings, equal to about
10 percent of its research updates, says Michael
Wilkins, who heads sustainable finance at S&P.
That’s more than twice as many cases as in the
previous two-year period.
Lower ratings can translate into higher bor-
rowing costs for companies, but environmental
changes can also help some businesses. S&P found
that when it took a rating action based on a climate
issue, 44 percent of the time it was upgrading the
bond or issuer. That might happen if, for example,
it expected higher revenue for a lithium producer
because electric car battery demand is rising.
Investors are pushing ratings firms to give them
more of a warning about the risks. “The pressure
is really mounting,” says Carmen Nuzzo, a former
senior economist at Morgan Stanley in London.
Nuzzo is leading a ratings project for Principles for
Responsible Investment, a United Nations-backed
organization that brings investors and other market
participants together to talk about systematically
incorporating environmental, social, and corporate
governance factors into the investment process.
More than 130 institutional investors—overseeing
a combined $23 trillion—and 14 bond grading com-
panies globally are participating.
Debt investors are still not completely clear as
to how thoroughly ratings firms have considered
After Hurricane Maria
in San Juan“We don’t
know if they’re
looking at
every power
plant”these risks, says Jonathan Bailey, head of environ-
mental, social, and governance investing at asset
manager Neuberger Berman Group LLC. “We
don’t know if they’re looking at every power plant
and their relationship to rising sea levels, and we
don’t know if they’re looking at rising tempera-
tures and their impact on productivity,” Bailey
says. “We want it to be clear how it’s being done.”
Ratings firms often have better access to infor-
mation than fund managers, which puts them in
a stronger position to weigh in on these risks or
compel the issuer to disclose more, he says.
But ratings firms have previously been slow to
pick up on risks. Enron Corp. was one of the largest
corporate frauds in U.S. history, but bond raters
were far behind equity short sellers in recognizing
the company’s problems: Moody’s, S&P, and Fitch
Ratings rated Enron investment-grade until fourdays before it filed for bankruptcy. A few years after
that, bond graders gave top scores to complicated
securities backed by subprime mortgages, which
helped inflate the mortgage bubble.
In the case of natural disasters, figuring out
the potential damage for individual compa-
nies and governments isn’t easy. Weather and
climate are known to mathematicians as cha-
otic systems, which means small differences in
assumptions can have huge impacts on predicted
outcomes. It’s often hard to know the cost of a cli-
mate shock—and who will bear it—in part because
government-backed and private insurance can
mitigate losses.
Still, it’s clear that risks are rising, and bor-
rowers should pay attention to them, says Rahul
Ghosh, who heads environmental, social, and gov-
ernance research at Moody’s in London. Disasters
themselves can wound borrowers, but govern-
ment policies concerning carbon emissions, for
example, can have a big impact on them, too.
“These trends will have pretty disruptive credit
impacts,” Ghosh says. —Emily ChasanFINANCE Bloomberg Businessweek January 29, 2018