Water, air quality, energy, biodiversity & extreme climate issues to affect credits

Fitch’s “ESG in Credit” report series discusses risk exposure to extreme weather events, water, energy and fuel, air quality, and biodiversity and waste issues.

Increases in the frequency and severity of EXTREME ENVIRONMENTAL CONDITIONS will test the limits of risk diversification over the coming decade. Both, acute (storms) and chronic (droughts) physical climate risks are expected to worsen over the next decade, posing risks to companies and assets, supply chains and economic growth.

The widening imbalance of WATER demand and supply, and the impact of climate change are likely to cause water-related credit issues to feature more prominently in credit assessments. Issuers are allocating more time and capital to water and wastewater management, and investors are focusing more on water risk issues, particularly within high-water-intensive sectors.

The growing relevance of greenhouse gas emissions and other AIR-QUALITY issues is beginning to affect industrial sectors where emissions are more complex and costly to reduce. The long lifespan of assets in shipping, real estate, aviation and infrastructure makes low-carbon retrofit of existing assets as well as access to funding crucial for decarbonization.

One outcome of the pandemic has been greater use of RENEWABLE ENERGY in many countries as a result of falling demand overall and growing policy incentives for renewable deployment. But a disconnect between supply and demand and intermittency of resources continue to pose challenges, with large-scale battery storage remaining prohibitively expensive in most cases.

Despite some action from corporates, investors and governments to halt BIODIVERSITY LOSS, there is a need for stronger coordination to tilt away from the most harmful activities. Global natural-asset consumption has exceeded natural-asset regeneration since the 1970s, with consumption currently at 1.6x more than the Earth can create.

To find out more about how these risks are impacting credit decisions and investments, click here to access Fitch’s ESG in Credit reports.

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Andrew Steel at Fitch Ratings spoke at the Sustainable Investment Forum Europe in April. Want to hear from him and other influential speakers on how Europe's sustainable finance market is progressing? You can now watch all sessions on demand here.