Amid rising climate-related financial risks, Fitch Ratings is considering the introduction of a new metric to flag climate risks in its sovereign credit ratings.
The rating agency published a discussion paper, which seeks feedback by Feb. 28, on the possible adoption of a “Climate Vulnerability Signals” (Climate.VS) metric to bolster the identification of credit-relevant climate risks.
While Fitch already uses a metric to highlight climate transition risks in its corporate ratings, it is now proposing to use a similar approach for sovereigns — which would also cover physical risks (such as heatwaves, wildfires and extreme storms) alongside transition risks, and would introduce an approach for combining the two.
The rating agency said that the initiative aims to ensure that climate risks are more systematically integrated into its sovereign credit ratings.
“Climate.VS would reflect Fitch’s analytical opinion on the materiality of potential exposure of global sovereign credit profiles to climate-related risks from 2025 to 2050,” the rating agency said.
These findings would be based on quantitative indicators, climate projections and qualitative judgments, it noted.
“Under the approach that we are considering, we would use Climate.VS as a screener to identify sovereigns with higher exposure to climate-related risks,” it said.
These higher-risk sovereigns would then face added scrutiny to determine, “whether any of the identified climate risks should lead to an immediate rating action,” Fitch noted.