New analysis from WRI and rating agency Standard & Poor’s looks at impacts on businesses and credit quality.
Last week, analysts from WRI and Standard & Poor’s, the world’s foremost provider of credit rating, unveiled a new analysis examining how U.S. federal climate change policies could impact the credit ratings of companies in the U.S. chemicals industry. The report is a first of its kind by focusing on the credit (rather than equity) implications for companies.
In How U.S. Federal Climate Policy Could Affect Chemicals’ Credit Risk, experts from WRI and S&P helped demystify the potential impacts of federal climate policy by providing analysts and investors with important information on how company creditworthiness could be affected.
The report finds that the impact of federal climate policy on credit risk will likely be modest for most of the chemical subsectors. Depending on the exact nature of the policy, actions taken by companies, and other variables (like gas and oil prices), many companies could see only minimal credit impacts from policy action.
Understanding Credit Ratings and Risk
This report analyzes how different climate change policies could impact a company’s credit rating. A credit rating is an assessment of a bond issuer’s willingness and ability to pay off the interest and principle associated with its borrowings in full and on time. While an investment grade credit rating is not a guarantee that a bond will be repaid (or vice versa), leading rating providers like Standard & Poor’s inform and guide investors. If climate policies were to positively or negatively impact a company’s credit rating, it could influence the cost of borrowing for the company and its ability to raise capital.
An Innovative New Approach
How U.S. Federal Climate Policy Could Affect Chemicals’ Credit Risk represents a new approach to analyzing and understanding how environmental policies can impact businesses and investors. First, it focuses on credit quality and second, it relies on two detailed policy scenarios:
A market based, economy-wide, greenhouse gas reduction policy (such as “cap and trade” legislation)
Regulation of greenhouse gas emissions by the Environmental Protection Agency
WRI applied its policy and environmental expertise to the process, and turned to S&P to benefit from its world-renown experience in assessing credit risk. Bringing different perspectives of each organization allowed for an evaluation of the potential impacts of different climate change policies on factors that would influence creditworthiness.
Modest Credit Impacts
WRI and S&P’s analysis found that the impacts of the federal climate policy scenarios would be modest for most chemical manufacturing subsectors. The chemical sector as a whole produces approximately $724 billion in products (according to Bloomberg) and accounts for approximately 5% of US greenhouse gas emissions.
The report also found that within these subsectors some energy-intensive companies could see negative impacts—especially among the highest emitters. In WRI’s view, these findings highlight the potential advantages that companies could gain from acting quickly to improve their energy efficiency and reduce their emissions versus their less efficient peers. Although the report did not look at opportunities, there are also clearly benefits that some companies will gain by reducing their emissions, such as being “first movers” toward increased energy efficiency.
The report provides a clear indication to investors and companies trying to measure and manage their exposure to credit risk that environmental issues should be considered as part of their analysis.
Challenges and Opportunities for the Future
While How U.S. Federal Climate Policy Could Affect Chemicals’ Credit Risk provides an exciting look at the potential impacts of climate policy on credit quality, it is only a first step.
The report analyzed an important sector of the economy – chemicals – and provided a clear analytical framework that can be applied beyond this industry. However, ultimately more work will have to be done to fully understand climate policy impacts on the credit for different industries. Among the unknowns, it is unclear what approach the United States will take to address climate change. Clearly, with federal legislation tabled for now, the EPA is moving toward regulations that would cut carbon pollution from the largest industrial emitters—but with each new policy choice comes with its own set of risks and opportunities for businesses.
While the issues are complex, this analysis shows how leaders in the financial and environmental communities can work together to find answers. The analysis conducted in How U.S. Federal Climate Policy Could Affect Chemicals’ Credit Risk shows that it is possible to develop a more meaningful and objective understanding of the real risks and opportunities that companies face in light of future action.
Ultimately, in WRI’s view, much of the world is already moving toward a lower-carbon future, and analysis like this can help provide a smoother transition for businesses and investors alike.