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Climate risk taking larger focus in assessing companies’ credit

Experts in capital markets are working to establish common standards for assessing climate risk.

Mark Schiefelbein/The Associated Press

Investors and financial analysts are increasing their focus on climate risk in assessing the credit-worthiness of a broad range of companies that are affected by carbon pricing, regulatory changes or extreme weather, the head of Canada's largest credit-rating agency said on Tuesday.

DBRS Inc. held a briefing in downtown Toronto for portfolio managers, analysts and others in the financial industry, and warned that governments and institutional shareholders are demanding that capital markets better reflect the ways that a worsening climate crisis will affect businesses.

Climate change "will have impacts across all segments of our economy," Douglas Turnbull, the Canadian chair of DBRS, said at the session.

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He said DBRS and its larger competitors, such as Moody's Corp. and Standard & Poor's Financial Services LLC, will look to a variety of climate-related risks as increasingly important criteria in their assessments.

The insurance industry, for example, not only faces growing losses from climate-related extreme weather, but comprises major institutional investors that have to ensure their own long-term financial health is protected.

"This is just getting on the radar screens of many credit-rating agencies … and it's something that I think is going to be critical to how we view the credit-worthiness of a variety of companies across Canada," Mr. Turnbull said in an interview.

"And some companies will be well prepared and some won't be, and that is going to be a qualitative difference when lining up a whole bunch of companies across an industry."

The federal and provincial governments are working towards a pan-Canadian climate strategy that Ottawa says will include a minimum national carbon price that will rise over time. The country's four largest provinces already have carbon-pricing plans and other regulations aimed at driving down emissions of greenhouse gases (GHG).

Meanwhile, the Liberal government plans this fall to ratify a United Nations climate accord that was reached in Paris last December, in which Canada committed to reduce greenhouse gas emissions by 30 per cent from 2005 levels by 2030.

Mr. Turnbull said the drive to reduce GHGs could seriously affect the business prospects for Canada's commodity producers, among other companies.

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"Virtually any commodity that suffers either price risk or regulatory risk that is currently in the ground might not come out of the ground," he said. "Or it might come out only under certain circumstances that might be financially onerous to the shareholders of the company or the rates of return for the company."

Experts in capital markets are working to establish common standards for assessing climate risk. With the leadership of Bank of England governor Mark Carney, a committee operating with a mandate from the Financial Stability Board will issue a report later this year that sets out voluntary guidelines.

At the same time, regulatory agencies have to ensure that companies report their climate-related risks, and are beginning to demand more robust reporting.

Exxon Corp. is denying allegations from the New York State Attorney-General that it misled shareholders about the risks that climate change poses to the value of its assets. The Wall Street Journal reported on Tuesday that the U.S. Securities and Exchange Commission is investigating the oil giant over its climate-related accounting as well as its valuation of assets given lower oil prices.

In a luncheon presentation, University of Waterloo professor Blair Feltmate warned the financial industry audience that climate change is a growing threat and that there is little chance the world can avert major disruptions.

Dr. Feltmate – who heads a climate adaptation institute funded by Intact Insurance – said Canada will be more prone to flooding, and that insurers are increasingly refusing to cover whole neighbourhoods where homes are vulnerable. As a result, homeowners who are hit by severe flooding may simply walk away from their mortgages – causing major losses for banks and other lenders.

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Changing weather patterns or extreme storms can also cause major losses, or even "strand" assets – as in California, where utilities may be forced to write off hydro dams that no longer get enough water.

"Capital markets must consider the contagion of climate change," he said.

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About the Author
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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