Fitch Incorporates Low-Carbon Transition Risks Into Credit Scores

Fitch Incorporates Low-Carbon Transition Risks Into Credit Scores

G&A's Sustainability Highlights (5.01.2022)
Monday, June 13, 2022 - 10:00am

Fitch Ratings, one of the “big three” credit risk rating agencies, is busy identifying “sector exposures to low-carbon transition risks,” with recently-assigned scores reflecting the rating agency’s view of the potential impact of climate change risk on creditworthiness on key sectors.

Fitch recently released scores for auto manufacturing, aerospace and defense, transportation, technology, media, and communications–with more sector reports and scores to come. In developing the assigned scores, Fitch is now incorporating its view of the creditworthiness impact on sectors, companies, and debt securities as the global society transitions to a lower-carbon economy between 2025 and 2050.

The analyses are being presented in Fitch’s “Climate Vulnerability” scores, which the agency says, “were developed in response to a need by investors for a long-term view of transition risks.” (The first scores were issued last year for utilities, oil and gas, and chemicals sectors.)

The new scores reflect the UN Principles for Responsible Investment’s (PRI) “Inevitable Policy Response Forecast Policy Scenario” (IPR FPS) that sets out predictions of significant acceleration for climate policies over the next three years.

The PRI, created by investors in 2006, now has 4,000 signatories representing US$120 trillion in AUM. The PRI launched the “Inevitable Policy Response” initiative in 2018. The latest scenario analysis projects a high probability of significant acceleration in climate policy by 2025, which is being driven by pressure from the business sector, investors, and society.

In announcing the IPR FPS 2021 report, the PRI said that its scenarios consider large-scale market shifts coming in carbon, energy, and land use. This signals to investors that they must focus on the transition to carbon neutrality by 2030 and pathways to net zero by 2050, and examine the investment opportunities that emerge as policymakers respond to the climate change challenges.

Fitch intends to create its “Climate Vulnerability” scores for all sectors–watch for sector analyses and scores for lodging and gaming, diversified manufacturing, metals and mining, fertilizers, healthcare and pharmaceuticals, retail, and consumer goods, building materials, and agribusiness by mid-year.

While Fitch’s scores are available by subscription, the scores for the transportation sector are publicly available for your reading to get an understanding of what is involved.

Transportation Long-Term Climate Vulnerability Scores: https://www.fitchratings.com/research/corporate-finance/transportation-long-term-climate-vulnerability-scores-25-04-2022

G&A has included news about Fitch’s initiative, as well as background on the PRI forecast report, in our Top Stories for you. We look forward to keeping you updated as the financial markets continue to incorporate the impact of climate change and how companies are preparing for the low-carbon transition into investment decisions.

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.