Written by Kate Duguid for Reuters on June 5, 2019.

On Tuesday, Fitch Ratings Inc. announced that its analysts will factor natural disaster and catastrophic risk into their ratings of residential mortgage backed securities (RMBS). Fitch will be the first of the three major U.S. credit rating agencies to integrate environmental factors into its risk evaluation. Grant Bailey, co-author of the Fitch report, told reporters that “RMBS investors are increasingly focused on natural disaster risk . . . it would be helpful to try to quantify that for them.”

In 2018, the California wildfires caused a record-breaking $24 billion in damages. Hurricanes Florence and Michael combined to cost $49 billion. With Fitch adjustments, a new penalty would be added to existing risk metrics. Mortgage pools with high concentrations in Florida and California would be distinguished for their high exposure to natural disaster and catastrophic risk, and analysts would adjust their RMBS ratings accordingly. Fitch does not expect the adjustment to affect existing ratings.

Moody’s Investors Service and Standard & Poor’s, representing a combined 85% of the credit ratings industry, are yet to adopt explicit measures of climate risk in their RMBS assessment metrics. In response to growing investor demand, Moody’s has made some early efforts to incorporate environmental, social, and corporate governance data into their systems. The service recently announced a carbon transition evaluation, allowing analysts to factor companies’ low-carbon transition efforts into their risk assessments.

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