Over the next decade, the probability and materiality of climate- related risks will increase. Due to the short time scales on which S&P assesses risk, this climate reality is largely missing from S&P’s credit ratings - especially in its financial forecasts.

Of 2300 ESG rating actions between April and December 2020, environmental factors contributed in only 24.1 Additionally, only credit rating analysts are part of credit rating committees “with potential for non-voting participation of sustainable finance analysts.”2

In 2019 S&P downgraded Pacific Gas & Electric Company (PG&E) only after the raging California wildfire led to its bankruptcy.3 Hardly a black swan event, PG&E’s exposure to wildfire risk had been increasing for over 20 years.4 This case is not isolated. In 2021, following the Texas freeze, Brazos Electric Power Cooperative filed for bankruptcy after holding an ‘A’ rating from S&P a week earlier.5 Such ex-post ratings actions and lack of attention to long-term horizons expose flaws in S&P’s climate risk approach.

Time horizons for climate change stress testing need to reflect the duration over which climate change risk factors are expected to fully materialize. The Prudential Regulatory Authority of Bank of England highlights that climate-related financial risks will likely grow over time. Longer-term scenario analysis needs to inform strategy and risk assessment.6

S&P says forecasts “generally include quantitative information two to three years into the future” and states that even when ESG risk factors are sufficiently visible (but expected to crystallize outside the financial forecast horizon), they are factored into credit ratings only through qualitative considerations.7 Given the pertinence of quantitative financial forecasts for communicating credit materiality, it is essential that S&P take steps to factor long-term climate risk assessments in its quantitative financial forecasts.

The Principles for Responsible Investment, to which S&P is a signatory, states that rating agencies should “include scenario analysis to address long-term [ESG] trends and risk trajectories.”8 Moritz Kraemer, who oversaw sovereign debt ratings at S&P until 2018, puts it plainly: “We have these really well-understood structural challenges coming our way over the time horizon of two, three, four decades, and that is in no way reflected in credit ratings.”9

Therefore we ask the Board to report on the feasibility of strengthening assessment of climate risk.



1 https://www.spglobal.com/ratings/en/research/articles/210215-the-esg-pulse-2020-lookback-11835444

2 https://www.spglobal.com/ratings/en/research/articles/211005-s-p-global-ratings-esg-roadmap-and-reminders-about-our-approach-12129801

3 https://www.cnbc.com/2019/01/08/sp-cuts-pge-ratings-to-junk-warns-of-further-downgrade.html

4 https://iopscience.iop.org/article/10.1088/1748-9326/ab83a7#erlab83a7s3

5 https://www.bloomberg.com/news/articles/2021-03-01/a-texas-power-firm-files-for-bankruptcy-after-historic-outages

6 https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/publication/2021/october/climate-change-adaptation-report- 2021.pdf?la=en&hash=FF4A0C618471462E10BC704D4AA58727EC8F8720

7 https://www.spglobal.com/ratings/en/research/articles/211005-s-p-global-ratings-esg-roadmap-and-reminders-about-our-approach-12129801

8 https://www.unpri.org/credit-risk-and-ratings/esg-credit-risk-and-ratings-part-1-the-state-of-play/78.article

9 https://www.bloomberg.com/news/articles/2021-09-23/climate-change-risk-looms-for-government-debt