According to an October 21, 2010 article in the Bureau of National Affairs' Daily Environment Report, climate-related performance may soon be factored into credit ratings of carbon-intensive companies. Based on comments by Standard & Poor's United Kingdom-based head of global carbon markets, the article reports that S&P is working on ways to integrate carbon risk analysis into its corporate credit rating system and hopes to prepare a methodology by early 2011.
S&P said the methodology would then be subject to "a rigorous criteria process review." The article highlights that developing the methodology will be "fiendishly complex" due to the need to consider direct emissions generated by a company, indirect emissions associated with the company's activities (e.g., use of electricity, supply chain, and transportation), and the ability to pass along carbon costs to customers.
S&P identified only one example to date of a company's credit rating being downgraded on the basis of greenhouse gas liabilities—a coal-fired generator in the UK reportedly downgraded in May 2009. Although S&P's head of global carbon markets expects there will be more downgrades based on carbon risk going forward, he did not expect the carbon risk methodology to result in immediate, wholesale downgrades of credit ratings.
S&P indicated that the impetus to include carbon risk in credit ratings has come from such developments as the proposed tightening of the European Union's emissions trading scheme in its third phase, beginning in 2012. Accordingly, companies with a substantial EU footprint may face more clearly defined climate-related liabilities, but the S&P carbon risk methodology may apply to non-EU companies as well. S&P indicated that a global rollout for the carbon risk methodology could begin as early as the first half of 2011.
