ESG Strategist - Are credit rating agencies overlooking climate risks?
Climate risks are mounting across the world and Europe is not immune to this global development. The devastating floods in Valencia and the wildfires in Portugal are just recent examples of a phenomena that is expected to become increasingly frequent. As it was noted in our previous research (see [1]), acute physical risks – such as floods, or wildfires – can result in significant direct economic damages, such as the loss of buildings, livestock, natural resources and infrastructure, which in most instances is only partly insured. Moreover, climate-related disasters can also have longer-term impact on economic growth. These can ultimately affect the ability of a country to repay its debt, such that climate-related risks should be – if not already - considered by credit rating agencies.
Hence, in this note, we aim to dive deeper into sovereign ratings, in order to understand whether climate-related indicators are accounted for by rating agencies when assessing country risks. We solely focus on climate-related indicators, given that past research has proven that the social and governance pillars (the other components within the E, S and G) remain the biggest drivers of sovereign risk premia (the exception being low-income countries where some environmental variables stand at the forefront - see [2]).
This note is structured as follows: below we discuss the data and the methodology used, followed by our interpretation of results. Finally, we finish the note by offering conclusions.
