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A growing number of asset managers is reassessing bond values tied to real assets, as a spike in the frequency of flash floods, fires and storms hits conventional pricing models.
The credit ratings industry has yet to figure out how best to incorporate climate risk in its models, so fixed-income investors are largely having to rely on their own assessments to navigate the new landscape they face. According to the Institute for Energy Economics and Financial Analysis, bond investors can’t turn to credit ratings for a useful evaluation of environmental risks.
Barclays analyst Maggie O’Neal is among those to have spoken out about the potential for nature-related risks to trigger downgrades and dent portfolio values for bond investors who don’t react in time. And sovereign downgrades would in turn lead to higher borrowing costs, ultimately “compounding credit risk for bondholders,” she said in a September report.
“On a sovereign level, it may have an impact on economic growth, which will impact the ability of sovereigns to raise taxes and be able to meet their debt obligations,” Bailey said.
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