Climate Change to Worsen Nat Cat Impact on Creditworthiness: S&P Report

April 21, 2015

Standard & Poor’s Ratings Services has issued a report warning that, “while recent history shows that natural catastrophes may have not been a major rating factor on corporate credit quality in the past, their effect in the future may increase considerably as we experience more frequent and extreme climatic events.

The report -“Climate Change Will Likely Test the Resilience of Corporates’ Creditworthiness To Natural Catastrophes”- also concludes that “globalization will exacerbate the effects of such catastrophes.” The report points out that so far, “rated companies have been able to mitigate any negative impact through a combination of liquidity management, insurance protection, disaster risk management, and post-event recovery measures. But we believe these measures could become considerably less effective in future.”

S&P explained that, “although natural catastrophes can result in companies experiencing property losses and production and market disruptions, such events are not frequently a factor behind our negative rating actions. Since 2005, we have identified natural catastrophes (tropical storms, floods, droughts, and earthquakes) as the main or material contributing factor for at least 60 negative rating actions (comprising downgrades and outlook revisions). This compares with about 6,300 corporate credit downgrades on companies in total over that period.”

S&P said that in “around 70 percent of cases, natural catastrophes led to a one-notch downgrade or a negative outlook that we subsequently resolved by affirming the rating. Across the rest of the sample, natural catastrophes contributed to multi-notch downgrades, and in about 10 percent of cases to default. Overall, this affected nearly twice as many speculative-grade than investment-grade companies because the former are more vulnerable to a downgrade, as our default statistics illustrate.”

Those past figures are now being reconsidered, however, in light of the “effects of climate change,” which, S&P said, “may increase the severity and frequencies of natural catastrophes.

“At the same time, growth in exposure in areas with high risk to extreme events, coupled with increased integration of the world economy through complex global supply chains, may exacerbate the effects of such catastrophes. This is because in an increasingly interconnected world, a major local natural catastrophe affecting an important link in the global economy is likely to have a worldwide and long-lasting impact.”

S&P’s report directly states that the rating agency expects “the frequency of natural catastrophes, along with their economic effects, to increase in the future.”

As a result the report said “companies will in our view need to improve their level of disclosure about their exposure to such events. In that regard we consider that the insurance industry’s 1-in-100 Initiative should provide more insight into the resilience of companies to such events.

Source: Standard & Poor’s

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