Credit ratings agencies are underestimating the risks posed by climate change or failing to recognise altogether how it may impact companies, thereby repeating the mistakes that led to the recent global credit crisis, a report published Wednesday said.
By not factoring in climate risk, rating agencies are assuming a BAU approach to fossil fuel investment, which could result in average global temperature increases of at least 4 degrees C, according to the report by the Centre for International Environmental Law (CIEL).
“In assuming a business as usual scenario, rating agencies may be artificially inflating the credit ratings and financial value of companies that contribute to global warming,” the report said.
“This poses significant risks for investors, and the climate, and could expose rating agencies themselves to legal liability.”
As an example, the report highlighted the Abbot Point coal terminal in Australia, the country’s largest.
Proposals have called for an expansion of the coal port, which would make it the world’s biggest but also threaten the Great Barrier Reef, according to environmental campaigners.
CIEL said the case demonstrated how Moody’s Rating Agency has failed to consider how a dynamic climate change trajectory could negatively affect investment in the project, resulting in a potentially inflated credit rating.
Companies that invest in fossil fuels also risk finding those assets eventually become “stranded”, meaning they are unviable, unsellable or their end products are unburnable due to new climate regulations.