London:
Almost 20% of global corporates could face rating downgrades by 2035 due to climate vulnerabilities if such risks are not mitigated, Fitch Ratings says.
“This represents the proportion of corporates that we estimate to have Climate Vulnerability Scores (Climate.VS) of 45 or above, which we propose to treat as ‘elevated’, in 2035. An elevated score could lead to material risk of a negative rating action in or before the year to which the score relates.,” said Fitch.
Only 2% of issuers have a Climate.VS at 45 or above in 2025, but this proportion increases to almost 20% of the publicly rated portfolio by 2035, or 315 issuers.
Fitch is proposing additional analysis, consideration and disclosure regarding the potential implications for the credit profile of climate-related transition risks for these issuers.
Fitch has calculated entity-level Climate.VS for over 1,650 publicly rated, non-financial corporates based on 2021 financial information.
If Fitch decides to use such Climate.VS for entities as a screening tool in its rating process, it would update the scores as and when updated full-year financials became available.
“An entity’s Climate.VS captures our view of its credit profile’s exposure to a rapid low-carbon transition between 2025 and 2050.The higher the entity score at a particular point in time, the greater the vulnerability under the UN PRI’s Inevitable Policy Response Forecast Policy Scenario, which we draw on in our analysis,” added Fitch.
“Our Discussion Paper sets out how we selected the level of 45 (on a scale of 10-90) for an entity’s Climate.VS as a proposed cut-off for further in-depth analysis of climate-related risks to the credit profile, because of a material risk of a credit rating action,” explained Fitch.
The most prominent drivers of transition risks are the decline in oil use after 2025 or 2030, depending on the region, the decline in natural gas usage, the gradual phase-out of coal (although also with large variations across regions), a strong push for emissions reduction in heavy industry and buildings, and a rapid phase-out of internal combustion engine vehicles in key markets, said Fitch.
The largest cohort of issuers above our threshold of 45 in 2035 is oil and gas producers, pipelines and energy midstream companies, which together account for almost half of all issuers with elevated Climate.VS.
Issuers with Climate.VS below the 45 threshold in 2035 are not fully immune to climate risks. Those scoring between 35 and 45 have business models that will need to adapt, sometimes through big capital investments, but their overall credit profile is less likely to be materially affected. Airlines and some building materials companies are examples of corporates with scores at this level.
The entity Climate.VS measurements “financial materiality”, the potential effect of climate risks on an issuer’s creditworthiness and financial performance, rather than “impact”, i.e. the issuer’s broader impact on the economy, environment, and people.