Climate risk pricing

Credit investors, rating agencies and climate: Exhibit 1

Written by Ulf Erlandsson

Download full paper (1.9mb)

When credit investors refuse to refinance coal, credit ratings drop. We analyse a case, the North Queensland Export Terminal (formerly known as Adani Abbot Point) that was downgraded to BB+ to BB- (outlook negative) on the back of coal-related refinancing concerns. In our analysis we pose two key questions.

Firstly, whether investments exclusions matter, and secondly, what the role is of rating agencies in climate mitigation. We believe that the downgrade is a very clear sign of the basic dynamics of climate-focused investing in fixed income.

First, investors not wanting to take on exposure to coal makes it difficult to access the capital needed for the coal entities through the primary market effect.

Second, this also illustrates a traditional role for credit rating agencies to operate in the climate transition. It may not be the direct risks of physical events or even policy changes that drive credit ratings downwards due to climate risks, but the risks around refinancings.

Finally, this highlights the recursiveness (and power) of fixed income climate engagement. A lack of refinancing drives credit ratings downwards, which again increases funding costs.

About the author

Ulf Erlandsson

Ulf Erlandsson

Founder, Board member

Dr Ulf Erlandsson founded the Anthropocene Fixed Income Institute and was its first CEO. A pioneer of climate-focused fixed income portfolio management, he was named Environmental Finance’s Bond Personality of the Year 2022.

Before you sign up

By completing this form, you agree to AFII sharing information that we think you may be interested in, including our insights on climate transition. See our Data Protection Policy for more information about how we collect and use your personal data, and any rights you may have in relation to your personal data. You may opt out from our distribution list at any time.