Climate risks miscalculated by credit ratings agencies

Inadequate accounting of climate risks could be opening the global financial system up to a fresh crisis, according to a new report.

The report by Washington DC-based Center for International Environmental Law (CIEL) suggests that by excluding climate risk from credit rating analysis, ratings agencies operate under the assumption that it is business as usual for a range of businesses and industries, including those engaged with fossil fuels and others easily affected by climate change.

This, it argues, could be a repeat of the mistakes that led to the global financial crisis of 2008, by artificially raising the credit ratings of related companies.

“Overstated credit ratings threaten not only investors and markets, but ultimately the global economy,” said Niranjali Amerasinghe, director of the Climate & Energy Program at CIEL.

John Connor, CEO of Australia’s The Climate Institute, said: “For example, focusing only on carbon pricing may overlook other 'pathways' that result in carbon-rich assets becoming stranded. This could include unexpected technological advances, shifts in investor sentiment, and proactive policy from big emitters like China. We have already seen these sorts of surprises from the advances in solar power.”

According to Ian Dunlop, former chair of the Australian Coal Association and CEO of the Australian Institute of Company Directors, there is a real need to learn from previous mistakes.

“In 2008, with the global financial crisis rapidly accelerating, Queen Elizabeth, in discussion with experts at the London School of Economics asked: ‘Why did no one foresee the timing, extent and severity of the GFC?’ The British Academy responded that ‘a psychology of denial gripped the financial and political world … the failure of the collective imagination of many bright people to understand the risks to the system as a whole’. Just so with climate change,” Mr Dunlop said.

“Rating agencies and financial markets in general will have to fundamentally rethink their approach to climate risk over the coming months.”

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Adam Zuchetti

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