– The future of the Kyoto-era to be discussed at COP28
– Insurer losses continue to rise due to natural disasters
– S&P drops ESG scores for credit ratings
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At COP28, Governments will discuss the future of the Kyoto-era Clean Development Mechanism (CDM), and how to transition to the new carbon crediting mechanism under the Paris Agreement. The Kyoto protocol applied emission obligations to developed nations, while the Paris Agreement includes all nations. The discussions will address procedural matters and the use of issued units for Paris compliance and voluntary purposes.
Invert Insights:
The transition to the new carbon crediting mechanism under the Paris Agreement reflects broader global commitment to addressing climate change while also introducing uncertainties and opportunities for the Voluntary Carbon Market. Clarity in communication and alignment with international climate goals will be important for the continued growth and effectiveness of the market.
The overall economic cost from natural disasters rose to $120B in the first half of the year, 46% above the ten-year average. As a result, the global insurance industry’s losses from natural disasters rose to $50B according to Swiss Re, a Zurich-based reinsurance group. In addition to the impact of climate change, land use planning in more exposed areas, such as the coast and wilderness areas, generate a hard-to-revert combination of high-value exposure in higher-risk environments.
Invert Insights:
The impacts of extreme weather events and climate change continue to reverberate throughout the financial sector, and insurers are being called to revise business models by making climate risk part of their management decisions, process, and products. To manage these risks, insurers are likely to push customers to implement mitigation and adaptation strategies to minimize damages and associated losses.
S&P Global announced they will stop using alphanumeric ESG scores when assessing credit quality. Their credit ratings reports, however, will keep the analytical narrative paragraphs as they are deemed more effective. Their ESG indicators were never sustainability ratings nor an assessment of an entity’s ESG performance, but were intended to explain the relevance of ESG credit factors in their rating analysis. Fitch, another credit rating firm, said that it isn’t dropping ESG scores from its credit ratings, and advocated for numeric scores, mentioning that their ESG Relevance Scores do not fundamentally change the way they assign ratings and are an observation, rather than an additional set of criteria.
Invert Insights:
S&P Global’s decision to drop alphanumeric ESG scores for credit ratings reflects a broader backlash against ESG investing, driven by political concerns that non-pecuniary factors could impact investor returns. While some argued that S&P’s decision was driven by political concerns, the firm has declared it was an outcome of internal analysis.
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