Credit ratings and climate change: Moody’s takes a stand

The Ritcey Report

Written by Lynn Healy-Goulet
February 2, 2018

This makes it official. Climate change is real – not a hoax – and one of the world’s leading credit rating agencies is taking the lead in proving the point. Here’s the headline: Moody’s Investors Service has sent out an alert to cities located on a U.S. coast, and states with coastal shorelines, to begin preparations for the consequences of climate change – or get ready for their credit rating to decline.

What is a credit rating?

A credit rating is an assessment of risk. Specifically, it’s a statement about the level of default risk to which a state or municipality could be vulnerable on loans or bonds. The lower the rating, the higher the estimated risk of default. States and municipalities with low ratings typically have to pay elevated interest rates.

Moody’s six indicators

According to a recent article in Business Insider1, authored by Jeremy Berk, December 1, 2017 (Cities and states could see their credit ratings crash if they don’t start preparing for climate change), ‘Moody’s lists six indicators that the agency uses to assess the exposure and overall susceptibility of U.S. states to the physical effects of climate change.’ Those indicators include coastal risks, like rising sea levels and flooding. The others cover, adds Mr. Berk, ‘an increase in the frequency of extreme weather events like tornadoes, wildfires, and storms.’

Bloomberg News weighs in

In a parallel article covering the same subject published on Bloomberg News2, authored by Christopher Flavelle, November 29, 2017 (Moody’s Warns Cities to Address Climate Risks or Face Downgrades), a more precise observation is made:
‘Based on those overall risks, Texas, Florida, Georgia and Mississippi are among the states most at risk from climate change. Moody’s didn’t identify which cities or municipalities were most exposed.’

Vanguard comes on board

The Business Insider article also referenced Vanguard, the world’s largest mutual fund provider, who is encouraging corporations to come clean about the risks climate change represents for their business.

Vanguard, as many of you know, manages assets in the trillions of dollars and the fact that they are recognizing the clear and present danger of climate change is significant. They are, for example, a significant shareholder in many major U.S. corporations, notably those operating in oil and gas. As Mr. Berk reports: ‘Oil giant Shell recently pledged to cut carbon emissions in half by 2050.’

Conclusion

As a concluding coda to my analysis, I wanted to mention that in the December 7, 2017 edition of Canadian Investment Review3, analyst Natalia Moudrak wrote: ‘While Moody’s report focuses on credit analysis in the U.S., it may reflect a wave of the future for reporting by Canadian issuers as well, which are by no means immune to climate change risks.’
The coastal towns, cities, and municipalities of the Atlantic provinces have plenty to think about, going forward.

Dave Ritcey, The Ritcey Team, Scotia Wealth Management


1 http://www.businessinsider.com/moodys-credit-ratings-could-drop-without-preparation-for-climate-change-2017-11
2 https://www.bloomberg.com/news/articles/2017-11-29/moody-s-warns-cities-to-address-climate-risks-or-face-downgrades
3 http://www.investmentreview.com/analysis-research/climate-change-and-credit-risk-8023