Climate risks are not being accurately reflected in recent credit rating actions, according to the Institute for Energy Economics and Financial Analysis (IEEFA). Their impact on ratings is mitigated by the long-term nature of such risks, and the challenge of quantifying the impact within the short-term credit assessment framework. Other mitigating factors for carbon-intensive companies include government support, strong standalone financials and regulatory policies. While ESG scores introduced by rating agencies improve the transparency of how these risks are incorporated into credit assessments, IEEFA said that in most cases introducing these credit scores has not led to significant rating changes. In separate analysis focusing on the European oil and gas sector, the IEEFA argued that a longer view of the European oil and gas sector should be offered to help them rate the uncertainties caused by the energy transition. “Often limited by their relatively short horizon, credit ratings find it difficult to account for the risk of the oil and gas sector’s long-term decline, given the unclear timing and magnitude of the downturn,” said Kevin Leung, author of the study and Sustainable Finance Analyst at IEEFA.
