Report: Ratings agencies ignoring financial risks of climate change

Financial ratings agencies such as Moody's and S&P could be repeating the mistakes of the financial crisis by failing to account for the risks of climate change, a new report has warned.

Legal lobby group the Centre for International Environment Law (CIEL) claims that agencies are handing out ratings for fossil fuel projects, based on a business-as-usual scenario synonymous with 4C global warming.

However, nearly 200 nations have agreed to limit global warming below 2C, with a number of nations calling for below 1.5C. The UN conference in Paris in December will likely solidify the 2C goal with legally binding targets for nations.

By failing to consider this 2C scenario, the CIEL report warns that ratings agencies may be artificially inflating the credit ratings and financial value of companies that contribute to global warming.

This creaties significant risks of ‘stranded assets’ for investors and could expose rating agencies themselves to legal liability.

“Fossil fuels are on the way out,” said Niranjali Amerasinghe, director of the climate & energy program at CIEL.

“Overstated credit ratings threaten not only investors and markets, but ultimately the global economy. They also contribute to overinvestment in activities that cause climate change, threatening our ecosystems and the people who depend on them.”

Dramatic deterioration

The report highlights the case of the Abbot Point coal terminal in Australia and claims Moody’s Rating Agency failed to seriously consider how a 2C climate trajectory could negatively affect the investment, resulting in a potentially inflated credit rating.

CIEL senior attorney Muriel Moody Korol added: “While Moody’s rated Abbot Point coal terminal as a run-of-the mill debt issuance, it, like other fossil fuel debt issuances, should be carefully analysed.”

“The value of fossil fuel investments in our current dynamic climate change trajectory could deteriorate dramatically just as sub-prime assets became worthless during the credit crisis. As rating agencies inadequately rated assets then, they are likely overestimating the value of fossil fuel assets now.”

Gymnastic change

Al Gore claimed back in 2013 that the world is on the brink of the “largest bubble ever” in finance, because of the undisclosed value of high-carbon assets on companies’ balance sheets.

However fossil fuel giants like Shell have refused to recognise the risk, claiming fossil fuels will continue to play a major role in the global energy system through to 2050 and beyond.

Climate change expert and author Jeremey Leggett, told a low carbon vehicle conference in London yesterday that the energy world is at the beginning of a period of “gymnastic change”.

“All the fossil fuel sectors and technologies are facing massive problems, some of them potentially existential threats.

“There are three emerging megatrends that will shape the future much faster than most people can envisage.

“On one hand, the developing technologies will see their obstacles diminish and opportunities increase. Meanwhile the incumbency will face fundamental cost concerns and increasing price volatility.

“This is all being played out against a backdrop where the Governments of the industrialized world have already declared the endgame for fossil fuels.”

Brad Allen

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