Legal & Regulatory News

European Central Bank releases paper on the disclosure of climate change risk in credit ratings

On the 13 September 2022, the European Central Bank (ECB) released a paper examining how credit risk agencies incorporate climate change risk in credit ratings, and how they disclose climate change risk to stakeholders. 

The ECB developed an analytical framework to compare ratings agencies' differing definitions, methodologies, assessment models, data usage, and disclosure practices.  The ECB's findings suggest that there are large variations, across ratings agencies and asset classes, in terms of methodologies and disclosure practices. The implications of this are that users are unable to draw a definitive conclusion on what the credit rating would have been in the absence of climate change risk.

The ECB has provided three main areas for improvement, to create more standardised and comparable climate-related disclosures, namely:

·         the level of granularity of definitions of climate change risk;

·         transparency around any models and methods used to estimate climate change exposure; and

·         disclosure of the magnitude of the impact of material climate change risk on credit ratings.

Click here to view the ECB paper.