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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°128 ▪ 11th January 2018



The top 5 carbon and climate news of 2017

With 2018 having just started, this is a good occasion to look back at what happened in 2017. The year was full of carbon and climate stories, but here we have selected what we consider the five main takeaways from 2017. Unsurprisingly, all of them are linked to financial activities and country risk.

  1. Rising climate damages

A first key element is that climate damages did not stop in 2017 and even reached some new records. For example, the National Oceanic and Atmospheric administration has reported total damage from natural disasters reached USD 306 bn in the United States in 2017, thus reaching their highest level for one year. The cost of Hurricane Harvey alone was no less than USD 125 bn. In Australia, 2017 was the third-hottest year according to the weather bureau. In Europe, August was the month of a significant heatwave that struck south-east France, Italy and Croatia, with climate change making such events four times more likely according to the World Weather Attribution (WWA) group. Moreover, it is estimated that 30% of the world’s population is now living in areas that face heatwave risks, based on potentially deadly temperatures at least 20 days a year, and this could reach 48% by 2100. The Lancet showed how particularly exposed older people can be to this threat. Natural disasters in developing countries often receive less media coverage, even though their effects are often more devastating; just to mention one example, flooding in India, Bangladesh and Nepal resulted in the deaths of 1,200 people and affected 40 million people this year. This is no small matter for insurers or for development banks and other financial institutions that finance climate adaptation measures.

  1. Emissions still growing

Our second key takeaway is the continuation of the increase in global carbon emissions. Despite the claims to curb them, they are estimated to rise by 2% in 2017, in part due to increased coal use in China. We started 2018 with only about 19 years of carbon budget (i.e. the time left until we exceed the IPCC’s 2°C carbon budget if our emissions stay as they are now), which is very short given the structural issues at stake. This carries obvious uncertainties for investors. Will this translate into growing risks of unexpected political shifts in how we address climate issues, or in growing exposure to negative climate impacts (which also carry economic consequences)? And what about the opportunities in terms of financing the energy transition? Investors have an important role to play given the massive investment needs at stake. However, the needs will themselves depend on whether we actually curb emissions or not.

  1. Uncertainties of the U.S. climate policies

A notable upset also came this year with Trump’s wish to withdraw the U.S. from the Paris Climate Agreement. Although the door was officially left open to re-engaging if the terms improved for the country – and even if U.S. states have also some decision power –, this is clearly a blow to international negotiations. As a reminder, the United States accounted for an estimated 13% of global GHG emissions in 2017. A question rising is however the medium-term impact on other countries, potentially strengthening their mobilisation. If environmental requirements are to diverge even further in the future, this may increase the probability for a European border carbon tax to be created for example, as mentioned in September by French President Macron with a goal to ensure European manufacturers are not exposed to unfair competition. Such a scenario remains uncertain today, but risk analysis should also consider the potential impacts of such non-linear events.

  1. China’s launch of the world’s largest carbon trading scheme

At the same time, carbon price initiatives continued to develop in 2017. This year saw in particular China’s introduction of the world’s largest carbon-trading scheme (covering no less than 1,700 fossil fuel power plants and about 6% of global GHG emissions). Does this confirm a significant move of China towards an ambitious energy transition? Although the country continues to rely significantly on coal, this is a real question with geopolitical and market implications as well. One thing is for sure, with about 26% of global emissions in 2017 the role of China is essential.

  1. Carbon issues gaining traction in financial markets

Lastly, we do have to mention recent evolutions in how investors are currently shifting to take more and more into account carbon and climate issues in their decisions. In France, the 2015 French Energy Transition law (Article 173) was the first piece of legislation to introduce mandatory climate reporting requirements for institutional investors, and the first deadline for reports was in June 2017. This corresponds to a much broader context of rising expectations on the integration of carbon and climate-related issues in investors’ risk analysis and disclosure (just see the TCFD Recommendations Report published in June or the work conducted by the HLEG at the EU level). These expectations are also extending beyond financial institutions to cover other corporates as well.

All of these elements are important not only for 2017. 2018 will again be a key year in this period that constantly intertwines great needs, uncertainties and hopes. Stay tuned with us to continue looking at the 341 remaining days of 2018!

Guillaume Emin, Project Manager



Sovereign Risk

Fitch warns the United States on the debt ceiling … Again!

On Wednesday January 10th, Ficth warned the United States that they could lose their sacrosanct “triple A” if the federal government debt ceiling is not raised in the coming months. In 2011 and 2013, the credit rating agency had already warned the country in the same way.

U.S. federal government debt ceiling (USD bn)

According to the latest forecasts of the Congressional Budget Office (CBO), a non-partisan congressional body, the U.S. Treasury will have reached this ceiling by the end of March or early April, which will prevent it from taking out new bonds and depriving it of liquidity if the House of Representatives and the Senate have not voted in the meantime a text raising this ceiling. In August 2011, a long period of stress related to the debt ceiling led Standard & Poor’s to downgrade the United Sates sovereign credit rating, losing their “triple A” for the first time ever. However, Fitch and Moody’s still give the highest rating on their scale to the world’s largest economy. Another well-known episode of stress related to debt ceiling was the early 2013 period when the resolution of the fiscal cliff (i.e., a situation in which a series of previously enacted laws would come into effect simultaneously, increasing taxes while decreasing spending) hugely and quickly increased the need to raise the debt ceiling (by c. USD 700 bn) to finance operations for the rest of 2013 fiscal year.

At the end of the day, we think that the “triple A” loss could better reflect the fundamentals of the United States but this downgrade would have dire consequences on all financial markets, specifically in the country of Uncle Sam.

Sources: Beyond Ratings, Datastream



Water scarcity: the 3rd global threat?

Evolution of global water productivity

In 2014, worldwide water productivity reached a 10 years’ low point with USD 18.3 of GDP per cubic meter of total freshwater withdrawal. It represents a 18% decrease between 2007 and 2014. Over the same period, GDP grew by 16% (in constant terms) despite the 2008/2009 crisis, meaning that global freshwater withdrawal has risen by about 30% in 7 years reaching 9.3%. Trend extrapolation is quite a tricky exercise, especially for long-term prospective, but considering that marginal water extraction costs are increasing, future growth could be slowed down by water access difficulties. Moreover, it could exacerbate competition between usages (agriculture, industry/energy, municipality) and countries. That is the reason why the World Economic Forum considers water crisis as the 3rd threat in term of impact after weapons of mass destruction and extreme weather events (Global Risks Report 2017).

Sources: Beyond Ratings, World Bank


Carbon/Climate Change

If you don’t have a good New Year’s resolution, here is an idea…

Evolution of total GHG emissions based on their key drivers and compared with some potential targets

This year again total greenhouse gas emissions will probably increase, as has been the case every year since 1999 except during the massive economic shock of 2009. In the present graph, we take a look at the different factors that have driven and continue driving this trend (based on GHG emissions including LUCF). Overall, the reduction of the energy intensity of GDP and of the carbon intensity of GDP are positive. However, this is not sufficient to counter-balance GDP growth impacts (including the increase of GDP per capita). Not only the challenge remains to reverse the curve of emissions, but we should also reach massive reduction levels if we wish to have a chance to cut emissions sufficiently to avoid extreme global warming. In this context, our analysis also shows that emissions should be decreased by no less than 3.2% every year to divide total emissions by 5 in 50 years. And if we wish to divide emissions by 10 in 25 years, emissions should even decrease by 8.8% every year, not very close to the 0.8% increase estimated for 2016. An idea for a good New Year’s resolution for 2018 globally?

Sources: Beyond Ratings, WRI/CAIT, BP, IMF, United Nations





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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via; Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)


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