Fitch Ratings plans to use its climate vulnerability scores to boost the process for identifying climate-related risks for its corporate credit ratings.
The climate scores not only examine sector exposure but also provide a view of the creditworthiness impact of sectors, companies and debt securities to a rapid low-carbon transition between 2025 and 2050.
The ratings agency said the scores were developed in response to investors need for a long-term view of transition risks.
It also noted that investors wanted a better understanding of the implications for instruments of different maturities and strategies.
Fitch initially launched climate vulnerability scores in 2021 for the utilities, oil and gas, and chemicals sectors, and added a broad range of sectors last year.
In a discussion paper, Fitch said it proposes employing its existing sector-level climate scores as a screening tool “to identify entities that are potentially more vulnerable to climate-related risks.”
Companies that are flagged as potentially facing higher climate risks will then be subjected to added scrutiny by Fitch’s credit rating committees.
The paper said that these climate risk scores focus on transition risks, rather than physical risks.
It added, “as we believe climate-related policy, market and regulatory risks are likely to have a more severe credit impact on corporates as a whole in the first half of this century than the physical risks from climate change itself.”
Fitch stated though that it would not anticipate any issuers to experience rating changes as a result of the new proposed approach.
However, it expects the proposal to put users in a stronger position to identify and react to the impacts of accelerating climate change policies.
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