Recently, Fitch Ratings issued a discussion paper that outlined a “contemplated framework for the analysis of physical climate risk for [Structured Finance] and [Covered Bonds] for the potential negative implications of physical climate events on asset performance, and, ultimately, on ratings.” In essence, a major credit ratings agency has effectively announced that physical climate risk--including “acute wildfire, wind, flood, drought, precipitation, and hail risk”--should be included when analyzing and issuing credit ratings.
This development provides further evidence for how companies are integrating climate risk into day-to-day operations, and the increasing salience of this issue for a number of different industries (e.g., finance, insurance). For example, here, with respect to the covered bond market, the physical risk posed by climate change to the underlying asset could have a significant impact on the risk profile of the security--and thus upon its price.
Irrespective of the extent to which climate data is subject to mandatory climate disclosures by governmental authorities, the private sector is nonetheless demanding certain climate data in order to function properly and profitably.
Against that backdrop, Fitch is now in the process of integrating physical climate risks into credit assessments. The move reflects an evolving concern among ratings firms and regulators alike that climate change is hitting the mortgage market — and the bonds that finance it — in ways that have yet to be adequately reflected in valuations. What happened in Switzerland should serve as a reminder that when climate shocks hit, their impact can be devastating, Rossiter said.
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