Fitch Adds Climate Risk to RMBS Ratings

Fitch Adds Climate Risk to RMBS Ratings

June 6, 2019
Photo credit: Getty Images/urfinguss
Fitch Ratings is planning incorporate natural disaster and catastrophic risk into its ratings of residential mortgage-backed securities (RMBS).
According to a Reuters report, the ratings agency’s adjustment would add a new penalty to existing risk metrics on ratings which have already been issued. This action is expected to identify mortgage pools where the exposure to natural disaster risk is higher than average, particularly in Florida and California. Fitch is currently seeking input on the new methodology and no date has been set regarding when it goes into effect.
"Over the last couple years, RMBS investors are increasingly focused on natural disaster risk. And we felt it would be helpful to try to quantify that for them," said Grant Bailey, an analyst at Fitch. "Our current proposed adjustment is fairly modest. But our goal here was to develop a framework that would allow us to dial the adjustment as needed."
Fitch would become the first ratings agency to factor climate risk into its RMBS assessments. In January, the company launched an integrated scoring system that shows how environmental, social and governance (ESG) factors impact individual credit rating decisions. Fitch introduced its ESG Relevance Scores across all asset classes, starting with over 1,500 non-financial corporate ratings, with plans to add banks, nonbank financial institutions, insurance, sovereigns, public finance, global infrastructure and structured finance to this scoring system.