Climate risks, here's how they can affect the rating

The climate it is increasingly an element strategic for developed and emerging economies: this is confirmed by the increasingly strict regulations dictated by the major economies and also the number of disputes linked to climate issues, which have increased very rapidly in recent years. But uncertainty over potential rulings and associated costs means such lawsuits have not so far influenced judgments on credit quality. This is what emerges from the study “Climate Litigation: Assessing Potential Impacts Remains Complex” by S&P.

Research explore trends of climate litigation, since S&P Global Ratings published “Climate Change Litigation: The Case For Better Disclosure And Targets” in 2021 and also aims to determine the potential influence of climate litigation on the economy, on solvency of issuers and when such exposure could result in a financial impact significant.

Constantly growing trend

According to S&P, the total number of disputes on the climate is quadrupled in the last 10 years reaching 2,410 cases in 2023 from 581 in 2013. Despite a slowdown in new cases compared to the peak recorded in 2021 (263 cases), the trend is expected to continue.

Historically, climate-related causes have carried out mainly in the United States (in 70% of cases)but they are now being brought all over the world, with various approaches and in a greater number of economic sectors.

Focus on the fossil fuel sector

The agency has reviewed several climate-related lawsuits, mostly from the soil and gas sectorwhich was the subject of many disputes. There is a concentration of so-called lawsuits on climate responsibility in the United States, where oil and gas are mainly concentrated and where companies such as Exxon Mobil are being sued (The State of California case) for their alleged role in climate-related harm and deception. The 2023 case against the oil and gas majors has not yet gone to trial, and there are uncertainties regarding several factors, including the final outcome.

The causes extend to several sectors

Despite this focus on the energy sector, lawsuits are filed increasingly also against companies in other sectorsincluding financial institutions. For example, in 2023, environmental groups filed the first climate-related lawsuit against a commercial bank, BNP Paribas, because it continues to finance the fossil fuel sector. And, in January 2024, Friends of the Earth Netherlands (Milieudefensie) announced the initiation of a climate-related lawsuit against ING Group for the same reason. +

Impact, rating and role of insurance

S&P believes that the strategic and financial impact of the litigation climate change on companies it could be significant but it remains difficult to measure, in particular direct and indirect costs. This makes it difficult to integrate this risk into the creditworthiness analysis.

The increase in climate-related cases has not so far affected credit quality and had no discernible impact on ratings of oil and gas companies rated by S&P Global. However, the agency believes that if costs associated with climate litigation increase, the potential impact on the competitive position and financial risk profiles of certain entities would change.

S&P also considered the role of the insurance sector in the context of climate litigation and notes that it is constantly evolving. A insurance coverage purchased by a company named as a defendant in a climate-related lawsuit could, in fact, play an important role in a company's ability to absorb costs associated with climate. As insurance's role in climate-related litigation evolves, S&P believes that policies insurance could include more specific clauses in the future regarding the coverage of climate risks and the related conditions, allowing companies to protect themselves from the costs of litigation.