As climate change makes disruptive weather events more frequent and severe, the financial impact on corporate earnings and credit ratings could be meaningful, and could increase over time, according to a new report from S&P Global Ratings. A review of the earnings call transcripts of S&P 500 companies in the past 10 years reveals that “climate” and “weather” combined among the most frequently discussed topics, even more common than “politics,” “the dollar,” “oil,” and “recession.”
“The number of instances where climate factors feature in our ratings’ analysis, and are key drivers of rating actions, shows that climate issues are becoming increasingly important in terms of their influence on credit ratings,” the company says.
Severe weather events will likely have more influence on credit quality as they become more regular, according to the report.
The company found that:
- In financial year 2017, 73 companies (15%) on the S&P 500 publicly disclosed an effect on earnings from weather events – but only 18 companies (4%) quantified the effect;
- Of those companies that did quantify the effect, the average impact on earnings was a significant 6%;
- Climate risk is a key topic of discussion for the CEOs of publicly traded companies, and management teams are becoming increasingly accountable for understanding and mitigating the impact of climate risk;
- This will become more critical as these events become more regular and possibly have more influence on credit quality.
Key Driver of Ratings
Of the nearly 9,000 research updates published from July 2015 to August 2017, climate factors were a key driver of a rating action in 43 cases – a significant number given the range of different risks that can have an impact on credit quality, S&P Global Ratings says.
Of these 43 rating actions, 65% were downgrades.
”It’s difficult to draw definitive conclusions as to why this is, partly due to the small sample size. However, two contributory factors could be that more companies are becoming vulnerable to climate change and severe weather events, but few are proactively mitigating the effects on both earnings and credit ratings,” according to the report.