ESG: Climate Risk and Credit

This commentary discusses the key concepts associated with climate risk and their potential impact on credit risk analysis.

Key highlights include:
-- An introduction to climate change and climate change scenarios.
-- The two economic dimensions of climate risk, i.e., physical costs, which are costs associated with adverse weather events and adaption, and transitional costs, which relate to the cost of decarbonising the economy (mitigation).
-- The consequences of climate risk that could generally result in an increase in an issuer’s risk of default or a reduction in asset valuations, and the need to consider the analytical time horizon.

“To date, we have observed limited credit impact due to physical climate risk, and transitional costs have also been gradual and manageable over our typical rating horizons…it remains to be seen with what level of urgency behaviours and regulations will change which, in any case, will take time to implement”, said Rehanna Sameja, Senior Vice President of European RMBS and Covered Bonds at DBRS Morningstar.