Green Investment Policies Hurt the Countries That Need the Most Help

  • S&P weighs downgrades for those facing more frequent storms
  • UNEP sees cost of capital rising where climate risks highest

The financial mechanisms that may hurt those countries most vulnerable to climate change are coming into sharper focus as credit rating agencies start to factor in the risks of a warming planet.

S&P Global Inc. and Moody’s Corp. are taking note of scientific projections for rising sea levels and more violent storms, which will undermine crops and threaten populations living close to sea level. Those that stand to be hit the hardest include many of the least-developed nations, such as Cambodia, Vietnam, Bangladesh and Senegal, an S&P ranking found.

“Suppose climate risk was priced into all sovereign bonds tomorrow -- which would be the countries that would lose the most?” Simon Zadek, head of the United Nations Environment Program’s inquiry into a sustainable financial system, said in an interview. “It would be countries that pay once, because it wasn’t their carbon that led to rising seas, and pay twice because the financial markets raise the cost of their capital.”

The comments highlight a perverse consequence of the environmentalist movement. Drawing the attention of investors to the risks from climate change is needed to help fund the $16.5 trillion needed to rein in greenhouse gases, according to International Energy Agency estimates. At the same time, that effort is starting to concentrate minds on the places where climate risks are highest -- and it’s mostly the poorest countries that need all the investment they can get.

Both S&P and Moody’s are looking at the impact of global warming in nations and how government policies will evolve following UN deal involving 195 nations in Paris in December to limit fossil-fuel emissions. 

“Environmental risks, physical risks and exposure to carbon regulations are taken into account in our assessment of creditworthiness,” said Henry Shilling, senior vice president at Moody’s.

S&P’s Program

S&P plans to analyze climate change through the weakening of a nation’s economics and fiscal position rather than a direct metric, according to credit analyst Marko Mrsnik. The New York-based rating agency downgraded its outlook on Japan and New Zealand’s rating after earthquakes in Fukushima and Christchurch.

“Natural disasters increasing in frequency and severity would imply additional economic and fiscal costs and could put ratings under pressure,” Mrsnik said by phone. “If there was a flood or tropical storm that destroys a substantial amount of the country’s productive capacity and poses economic issues, the rating would likely be reconsidered. It’s particularly relevant in Southeast Asia and the Caribbean.”

S&P’s Vulnerability to Climate Change list named rich industrial nations as the least vulnerable -- with Luxembourg, Switzerland and Austria at the bottom. The U.S. and Britain were 10th and 12th least vulnerable.

The Philippines, which ranked seventh most vulnerable, already is seeing the effects of the rising global temperatures. It was battered by Super Typhoon Haiyan in 2013, a tropical storm that triggered landslides and may have killed as many as 10,000 people.

“We’re in the process of getting a catastrophe bond,” said Finance Minister Cesar Purisima in an interview. “In our fiscal planning, we consider that by creating line items that address disaster risk. We’re working within and with others to come up with risk-pooling mechanisms.”

The Philippines has a credit line with the World Bank that provides liquidity in the event of a natural disaster and is planning to get a second, he said.

“I don’t think the answer is to pretend that the risks aren’t there or to discourage the financial sector from pricing them in,” Zadek said. “What we need is some kind of compensation mechanism that will be an intergovernmental agreement of some kind, to ensure that by correcting mispricing errors in the financial sector, the most vulnerable do not suffer as a result.”

HSBC Holdings Plc is “spending time thinking about” the Vulnerable 20, a group of finance ministers from the 20 countries that are the most exposed to climate change, according to Spencer Lake, vice-chairman of global banking and markets.

“The economic and people losses that go along with catastrophic, weather related risk are significant, and a lot of funding is required to build out mitigation and adaption mechanisms to help these economies,” Lake said.

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