Climate could become ‘big risk factor’ in credit ratings, warns Japanese agency

R&I will develop research on the link between ESG and credit ratings

Japanese credit ratings agency Rating & Investment Information Inc (R&I) has warned that it is considering ratcheting up efforts to incorporate environmental factors into ratings in the long term.
A report said that R&I, which is owned by Japanese media giant Nikkei, expected the importance of environmental factors in credit rating evaluation to grow in importance going forward.
“Although rating actions mainly caused by environmental factors are not deemed to increase considerably in the short to medium term, they may need to be recognised as a big risk factor in the long term,” it said.
Among sectors identified as being at increased risk in the report were the automobiles and energy industries, as well as depository financial institutions that stand to be held responsible for lending to companies or projects affected by the low carbon transition.
Meanwhile, positive impacts are possible for shipping, construction machinery, and homebuilders, according to the report.
R&I said it hit two insurance groups – Mitsui Sumitomo Insurance and Sompo Japan Insurance – with downgrades in 2012 on the back of environmental factors affecting the firms, after several affiliated companies saw their risk buffers “substantially damaged” by paying out large claims in the wake of natural disasters.The payouts are among what currently remains just a “few” cases of rating changes as a result of environmental factors by R&I, according to the report, which has just been translated into English.
R&I also confirmed in the report that it will be developing research on the relationship between ESG factors and credit ratings, as well as publishing its outlook on sector-specific ESG factors.
It is a topic of growing focus around the world, and R&I’s translation of its report into English comes on the back of new technical advice from EU’s securities markets regulator ESMA, advising against mandating credit ratings agencies to include sustainability in their ratings. However, CRAs are generally stepping up on the topic anyway, and the PRI noted earlier this year that ESG factors are becoming “more explicit” in CRA commentaries.
Moody’s marked the outlook of US electric utility company Edison International down from stable to negative in December, citing cumulative exposure to wildfires as the key rationale.
Lloyd’s of London’s had its outlook revised from ‘stable’ to ‘negative’ in October 2017 on the back of announced and estimated losses from hurricanes Harvey and Irma.