Climate change: testing the resilience of corporates’ creditworthiness to natural catastrophes
| Risk management | |
|---|---|
 | |
| Authors | |
| Miroslav Petkov | Standard & Poor’s, London |
| Michael Wilkins | Standard & Poor’s, London |
Introduction
While recent history shows that natural catastrophes may have not been a major rating factor on corporate credit quality in the past, their effect in the future may increase considerably if, as scientific evidence suggests, we experience more frequent and more extreme climatic events. If such extreme events were to occur, companies’ existing insurance and overall disaster risk management measures could, in the opinion of Standard & Poor’s Ratings Services, become considerably less effective. Therefore, we see improvements in companies’ disclosures about their exposure to natural catastrophes becoming more relevant to our ratings analysis. (Watch the related CMTV segment, titled ‘Why the impact of natural catastrophes on corporates’ creditworthiness may increase in the future,’ dated 21 April 2015.)
The economic cost of natural catastrophes has risen significantly over the past 10 years (see Figure 1). However, through a combination of existing preventive measures, most of the companies we rate have managed to mitigate the impact of such events on their corporate credit profiles. Nevertheless, with scientists predicting an increase in extreme climatic events, firms’ vulnerability to natural catastrophes is in our view likely to be sorely tested.
Overview
- Generally, companies have so far managed to mitigate the effects of natural catastrophes through liquidity management, insurance protection, natural disaster risk management, and post-event recovery measures.
- However, the more frequent and more extreme climatic events many scientists predict could adversely affect companies’ credit profiles in the future.
- Greater disclosure of firms’ exposure to extreme natural catastrophes should, in our opinion, encourage them to bolster their resilience to these events and thereby aid transparency.
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