Climate Change-Related Legal AndRegulatory Threats Should SpurFinancial Service Providers To Action
Primary Credit Analyst:
Miroslav Petkov, London (44) 20-7176-7043; miroslav.petkov@spglobal.com
Secondary Contacts:
Alexandre Birry, London (44) 20-7176-7108; alexandre.birry@spglobal.comStuart Plesser, New York (1) 212-438-6870; stuart.plesser@spglobal.comMichael Wilkins, London (44) 20-7176-3528; mike.wilkins@spglobal.com
Table Of Contents
Quantifying The Effect Of Climate Change Starts With Good-Quality DataChanging Attitudes Could Bring New ResponsibilitiesThe Tangible Financial Impact May Initially Be Low, But Will GrowMacroeconomic Changes May Hurt The MostDespite Everything, Climate Change Also Offers OpportunitiesIndicators For Measuring Exposure To Climate ChangeThis Emerging Risk Has Long-Term ImplicationsAppendix: How We Capture Climate Change Exposures In Our RatingAnalysisRelated Criteria And Research
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Climate Change-Related Legal And RegulatoryThreats Should Spur Financial Service ProvidersTo Action
The impact of climate change on banks, insurers, and asset managers (financial services companies) is likely to bemultilayered and significant over the long term. Climate change could have broad-based consequences for companies'investments and loan portfolios; could expose them to additional reputational and operational risks, and could changethe general environment in which they do business. Specifically, while companies could see an increase in bad loans,falling asset values, and more frequent claims on insurance, climate change could also lead to additional regulatorycosts and possibly legal challenges from activists.There is no time for complacency--over time, climate change may become a material risk factor, particularly for thosefinancial services companies that haven't already started to prepare for it. Indeed, S&P Global Ratings considers that if authorities further delay taking the necessary steps to address climate change, the negative long-term effects onfinancial services as a whole could be profound.Despite widespread discussion of the various ways that climate change may affect financial services, it remains difficultto quantify that impact accurately. However, we are sharing some indicators that we will increasingly use to help usidentify which financial services companies are likely to be hardest-hit by climate change and which are bestpositioned to benefit from the opportunities climate change may create.
Overview
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Climate change is likely to have uncertain, but considerable, effects on the financial services industry over thelong term.
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Reputation, regulation and litigation may represent greater threats than the direct costs of climate change.
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The impact of climate change is difficult to quantify based on current disclosures regarding exposure to climaterisks.
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Until disclosure improves, we have shared some indicators that help us identify which financial servicescompanies are likely to be hardest hit by climate change.
Quantifying The Effect Of Climate Change Starts With Good-Quality Data
The various ways climate change may affect financial services have been widely discussed. For example, the Bank of England recently released a report that identified three main ways climate change could affect insurers--throughphysical, transition, and liability risks. The Financial Stability Board (FSB) created a task force on climate-relatedfinancial disclosures. In its Phase 1 report, it classified the risks into six categories. They include two types of physicalrisks: acute (driven by extreme weather) and chronic (that is, caused by longer-term changes in precipitation,temperature, and weather patterns). The other four are nonphysical risks: policy/legal/litigation; technological
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changes; market and economic responses; and reputational considerations.Despite all the talk, it remains difficult to quantify the potential impact. We consider that, in general, disclosure aboutclimate-related exposures remains insufficient for an accurate determination. Even where we have enough data, thecomplex nature of the risks and uncertainty create significant difficulties in estimating the potential impact. Theseuncertainties include how exactly global warming will affect the climate in future, the legal and regulatory changes,and technological developments that may be introduced to combat the consequences of climate change.Over time, advances in science and modeling, combined with improved disclosure as a result of initiatives such as thatlaunched by the FSB, could help us quantify the risks. In the meantime, our analysis looks to incorporate the potentialimpact of climate change exposures by considering indicators to help us identify the financial services companies mostthreatened by climate change and those that are likely to gain from the new opportunities (see chart).
Changing Attitudes Could Bring New Responsibilities
Initially, the immediate costs of climate change may be low (see "Insurers May Anticipate A Smooth Road Ahead On
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Climate Change-Related Legal And Regulatory Threats Should Spur Financial Service Providers To Action