For Immediate Release:
June 24, 2015
Washington, DC – A new report launched today, (Mis)Calculated Risk and Climate Change – Are Rating Agencies Repeating Credit Crisis Mistakes?, demonstrates that by not adequately accounting for climate risks, rating agencies could be repeating the mistakes of the credit crisis where risk was underestimated to the detriment of the global financial system.
By not factoring in climate risk, credit rating agencies are assuming a business as usual approach to fossil fuel investment, which would result in 4° Celsius or greater warming of the planet. However, nearly 200 nations have agreed to limit global warming below 2°C, with a number of nations calling for below 1.5°C. Even as governments work together to achieve that goal that goal, there is a growing trend in international, national, business, consumer, legal, regulatory, and social efforts to mitigate climate change and avoid the current trajectory.
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. This poses significant risks for investors, and the climate, and could expose rating agencies themselves to legal liability.
“Fossil fuels are on the way out,” says Niranjali Amerasinghe, Director of the Climate & Energy Program at CIEL. “Overstated credit ratings threaten not only investors and markets, but ultimately the global economy. They also contribute to overinvestment in activities that cause climate change, threatening our ecosystems and the people who depend on them.”
The report highlights the case of the Abbot Point coal terminal in Australia and demonstrates how Moody’s Rating Agency failed to seriously consider how a dynamic climate trajectory could negatively affect the investment, resulting in a potentially inflated credit rating.
“While Moody’s rated Abbot Point coal terminal as a run-of-the mill debt issuance, it, like other fossil fuel debt issuances, should be carefully analyzed,” says Muriel Moody Korol, Senior Attorney at CIEL. “The value of fossil fuel investments in our current dynamic climate change trajectory could deteriorate dramatically just as sub-prime assets became worthless during the credit crisis. As rating agencies inadequately rated assets then, they are likely overestimating the value of fossil fuel assets now.”
If rating agencies fail investors, individuals, and financial regulators again, credit rating agencies could face potentially significant legal risk, says the report.
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Contact: Muriel Moody Korol, mkorol@ciel.org
Center for International Environmental Law (CIEL) – Founded in 1989, the Center for International Environmental Law (CIEL) uses the power of law to protect the environment, promote human rights, and ensure a just and sustainable society. CIEL is dedicated to advocacy in the global public interest through legal counsel, policy research, analysis, education, training, and capacity building.
Support for the report:
John Connor, CEO of The Climate Institute, said it was important for each part of the investment chain to appreciate the different ways that climate and carbon risk could manifest.
“For example, focusing only on carbon pricing may overlook other ‘pathways’ that result in carbon-rich assets becoming stranded,” said Mr Connor. “This could include unexpected technological advances, shifts in investor sentiment, and pro-active policy from big emitters China. We have already seen these sorts of surprises from the advances in solar power, and the US-China announcement in September.”
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“Human-induced climate change is occurring faster and more extensively than officially acknowledged, primarily caused by carbon emissions, agriculture and land clearing. It is essentially a matter of risk management on a global scale. This requires catastrophic risk management techniques unlike anything previously contemplated by financial markets, investors or business at large. In 2008, with the Global Financial Crisis rapidly accelerating, Queen Elizabeth, in discussion with experts at the London School of Economics asked: “Why did no one foresee the timing, extent and severity of the GFC?” The British Academy responded that “A psychology of denial gripped the financial and political world, _____ the failure of the collective imagination of many bright people to understand the risks to the system as a whole.
“Just so with climate change. The same mistakes are being made again, as the same denial grips government, corporations and the investment community, only the risks now are far greater. Quite simply, the future of humanity. The understanding of these risks at top level is abysmal. The CIEL report is a long-overdue wake-up call to rating agencies; the use of the outmoded methodologies it outlines, in current circumstances with the extensive scientific knowledge available, is a fundamental breach of fiduciary responsibility.
“Rating agencies and financial markets in general will have to fundamentally rethink their approach to climate risk over the coming months. On the other hand, we have solutions to climate change. Indeed the transformation to a low-carbon economy is the greatest investment opportunity the world has ever seen. Provided the challenge is faced honestly and genuine leadership emerges in the investment community.”
Ian Dunlop
Ian Dunlop was formerly an international oil, gas and coal industry executive, chair of the Australian Coal Association and CEO of the Australian Institute of Company Directors. He is a Director of Australia21 and a Member of the Club of Rome. He was a candidate for the Board of BHP Billiton in 2013-14 on a climate and energy platform
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(Mis)calculated risk and climate change is a very timely and valuable report that highlights the financial risks of stranded assets. Ratings Agencies failed to properly evaluate the real financial risks that lead to the global financial crisis. Once again, these same agencies are ignoring the full risks that global policy change is inevitable if the world is going to avert a climate disaster. As such, their application of ‘business as usual’ ratings standards is setting them up to fail, again. The Adani Abbot Point Coal Terminal case study is a telling example of exactly one such misjudgement.
Tim Buckley
Director of Energy Finance Studies, Australasia
Institute of Energy Economics and Financial Analysis