Insurance and Climate Change column

S&P Green Lighting Climate Risk Mitigation

By | July 10, 2014

How a company manages its risk in the face of a changing global climate is slated to become an ever-greater factor in a company’s worth.

Today’s business leaders, whether or not they believe in climate change, face having to take steps to mitigate their exposure to climate-related losses. Not doing so will risk punitive regulatory reaction or, at worst, losses from more frequent extreme weather events.

It’s no longer a matter of choice.

While physical losses have yet to have an impact on corporate bottom lines, those who evaluate companies are already looking at how managers are dealing with all of this.

Yet-to-be seen effects on a company’s value include costs of facility repairs, interrupted supply lines and damaged goods due to storms – though there are plenty who say Superstorm Sandy was driven by climate change and therefore it’s already factoring itself into the economy.

Up next are considerations of rising costs for insurance for those with greater risks, and the attitudes managers have toward those risks.

“It’s going to show up in their numbers,” warned Steve Dreyer, managing director of Standard & Poor’s U.S. utilities and infrastructure ratings.

According to Dryer, S&P is noticing more companies taking a serious look at their climate-related exposures. S&P, in turn, is looking at how companies are looking at their risk, how they are managing the risk they face, as well as their perspective on that risk.

Are mangers being cavalier about their exposures? Or are they taking proactive steps to manage their risk and spread out their investments? Are they actively seeking ways to reduce their insurance costs?

“We will consider that in their management-governance score and that will affect their ratings,” Dreyer said.

By S&P’s definition the analysis of management and governance credit factors is a part of its corporate ratings general criteria that “supplements the everyday metrics of traditional credit analysis such as cash flow, leverage, and EBITDA interest coverage ratios, by providing a way to analytically document our understanding of the capabilities, intentions, and tendencies of executive management and boards of directors.”

Many managers are already paying attention to climate-driven risks, Dreyer said.

As well they should. While going from AA to BB is unlikely – at least in the near future – any ratings drop can be impactful, as most in business understand.

Just how out in front a company is in dealing with climate change varies by sector, but one sector out that is out in front is the insurance industry, according to Neil Stein, a credit analyst with S&P’s financial institutions group.

“In general, insurers have coped well with an increase in the number and frequency or extreme weather events, and S&P believes insurers are well prepared to deal with natural catastrophes,” Stein said. “In general, insurers have been able to manage the weather events over the last number of years because of risk diversification, as well as effective underwriting, risk management and risk mitigation practices, in addition to very strong capitalization. The ratings impact of weather-related natural catastrophes has been limited because insurers have comfortably absorbed the losses associated with them.”

Climate change proactivity also varies by location.

Companies in Europe are more aggressively tackling these risks than those in the U.S. One way they’re doing that is by issuing green bonds, which have taken off in Europe but have yet to catch on in the U.S. – although by some accounts bonds to fund environmentally-friendly projects could double this year.

It’s still an emerging market, with some drawbacks – there are no requirements to ensure bond money is being spent on “green” projects – but they do offer companies a way to mitigate climate change risk.

Dreyer has seen it in the sector he covers with energy companies raising money dedicated to developing building renewable energy generation methods. Lately retail companies, chemical companies, metals refiners and others are raising funds that would be earmarked for climate-related costs, he said.

“What they’re finding is there’s an enormous investor appetite for these things,” Dreyer said. “There aren’t enough investments out there to meet the demand currently.”

While U.S. companies have been slower to catch on, the investors who are driving this include the likes of U.S. pension funds and life insurance companies, so it may be just a matter of time before green bonds become a regular feature on U.S. tickers and stock pages.

“I think it’s coming here,” Dreyer said.

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Topics USA Climate Change

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