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U$ 7.5 million paid in drought index coverages

Climate risk is now a variable to be taken into account by rating agencies

July 28, 2019

Martin Burbridge

The agency Moody’s announced the purchase of a consultancy specialized in measuring the impact of the environment on the economy. Their decision goes against Donald Trump’s policy.

At a time when Europe is breaking all records for maximum temperatures, Moody’s acknowledged that climate change is not a short-term issue or an “invention,” as U.S. President Donald Trump has repeatedly said. On the other hand, it is a variable that influences the world economy, so it needs to be included in risk assessments.

This change of opinion is a novelty in the Wall Street environment, given that the current U.S. government is on the sidewalk of climate change deniers.

But Moody’s, (which will probably soon be followed by Standard & Poor’s and Fitch), has decided to take this very much into account by announcing the purchase of a majority stake in Four Twenty Seven, a consultancy specialising in assessing the environmental impact on the economy and businesses.

The company is dedicated to quantifying how extreme weather phenomena, such as floods, hurricanes, earthquakes, heat waves, and rising sea levels can affect the company, but also global warming, which for no one in the consulting firm is an isolated fact. It analyzes 2000 companies from 196 countries, while in the U.S., it covers more than 760 cities, all thanks to the use of big data.

“We began to consider all these risks very seriously. We can’t assess what we don’t understand,” explained Myriam Durand, who is in charge of Moody’s Investors Service global ratings. This shows that the agency understands that climate risk has to be part of its assessments to make them as reliable as possible.

AN OASIS

This step taken by Moody’s looks like an oasis in the middle of the information desert in which the Trump government has decided to remain on this issue.

For several years now, even before he embarked on a political career, the real estate tycoon has raised conflicting points about the climate change process. In 2012, through his Twitter account, he said: “The concept of global warming was created by and for the Chinese, with the aim of making the American manufacturing industry uncompetitive”, a concept that he then put into practice during his presidency.

In spite of this, today it seems incredible that Trump himself signed in 2009, along with 50 other business leaders, a full-page request in The New York Times to ask then-President Barack Obama to defend “significant and effective measures to combat climate change, that would allow humanity and our planet to be protected”.

AWARENESS

But even if the current U.S. government doesn’t want to recognize climate change, financial markets and businesses are becoming aware of the dangers ahead.

How can climate risk influence a company’s or government’s credit rating? In its ability to repay on time and in the form of a loan it took or a bond it issued in the event of a catastrophe affecting it. In that sense, the best example is that of Puerto Rico, where in September 2017 Hurricane Maria devastated (literally) the island, leaving damages of U$S 100,000 million and an impact that, for the Puerto Rican economy, meant going back 40 years in time.

Therefore, it has already been proven that global warming threatens the credit capacity of many economic agents. Repeated floods, fires or extreme temperatures could generate, for example, large migrations of inhabitants of a city, causing a significant drop in its tax revenues and, therefore, its ability to pay a debt.

Moreover, it is a proven fact that investors are already aware of these kinds of factors. According to a study by Smith’s Research and Gradings on the U.S. municipal bond market, the proportion of investors who expressed concern about the impact of the environment rose from 6% to 19%. This is despite the fact that many coastal cities in the country still have AAA ratings, even if there is a history of Hurricane Katrina in the city of New Orleans.