A report – “Dealing With Disaster: How Companies Are Starting To Assess Their Climate Event Risks” – from Standard & Poor’s London office points out that the “increasing frequency of extreme weather events such as flooding, intense storms, heat waves, and cold snaps is putting pressure on companies to identify, quantify, and disclose the material risks related to such events.”
The report noted that “extreme weather events were responsible for 90 percent of documented natural catastrophe loss events in 2013, causing $124.5 billion of overall losses out of the $135 billion total natural catastrophe losses. Worsening financial performance as a result of climate event risk can negatively impact both short-term liquidity and long-term debt financing positions, leading to an increase in credit risk.
The report also indicated that S&P thinks “industry regulators and investors are likely to focus more closely on climate and carbon risks as an indicator of company performance and, for the latter, value. Investors and issuers are beginning to recognize the impact of carbon pricing on corporate profitability, but the effects of climate events on a company’s business and financial risk profiles are less well recognized.”
S&P explained that “unlike exposure to emissions regulation, which trading carbon credits and investment in emissions abatement can address, the unpredictable nature of climate events constrains the planning and implementation of effective risk management strategies.”
S&P’s Rating Services unit expressed its opinion that “corporate credit quality may suffer if companies do not implement adequate risk management measures regarding climate events.” The report examines “how climate event risk can damage profitability, impair asset value, and constrain cash flow,” which can “weaken a company’s liquidity position and compromise its ability to raise funding and service debt over both the short term and long term.”
S&P stressed that under its policies “only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.”
The implications are clear, however, that in the future when S&P is considering any rating, particularly those involving the re/insurance industry, the potential impact from climate change will be a factor under consideration.
Source: Standard & Poor’s
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