The U.S. economy's recent credit downgrade from AAA to AA+ by Fitch Ratings is a stark indication of the real economic fallout from the GOP's assaults on democracy.
Welcome back to the Climate Nexus finance newsletter – a regular update that looks at the big stories and players at the intersection of climate change, finance, regulation, and energy, with tips for the week ahead.
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Republicans downgrade America
The U.S. economy's recent credit downgrade from AAA to AA+ by Fitch Ratings is a stark indication of the real economic fallout from the GOP's assaults on democracy. On top of that, Fitch Ratings' incorporation of "ESG Relevance Scores" into their assessments—accounting for factors such as environmental impact exposure—underscores the extra damage the GOP's intransigence on climate could inflict on our nation's creditworthiness and economic stability.
There is also growing awareness that climate change puts sovereigns at downgrade risk. Inaction on carbon emissions will raise debt servicing costs for 59 nations within the next decade, including major economies such as China, India, the U.S., and Canada, according to a new study by researchers at University of East Anglia and the University of Cambridge. While developing nations with lower credit scores are most likely to feel the brunt of the physical effects of climate change, which risk exacerbating unjust debt burdens, highly rated nations are also at risk of dramatic downgrades.
Oil price rise risks political surprise
Oil prices are on the rise again, driven by geopolitical instability and worsened by extreme temperatures. Historically, this has been mixed news for clean energy. On the one hand, expensive, volatile oil is a good reason to invest in stable, cheaper alternatives. On the other, higher prices at the pump are very bad news in the short term for the political prospects of governments, and the Biden Administration is desperate to keep prices low ahead of the 2024 Presidential election. Unless the nation’s reliance on them is reduced, OPEC, Russia, and US drillers may continue to have disproportionate influence over the future of climate policy in the United States. Another reason to get off gas as quickly as possible.
Just transition or no transition
A new paper from Noah Kauffman at Columbia University highlights the importance of investing in communities in areas that produce fossil fuels if we want the politics of the energy transition to work. However, “if decarbonization efforts prove consistent with an increasing rash of communities sinking into economic distress, net zero may be a pipe dream for major fossil-fuel-producing countries like the United States.” The paper also points out how, despite a series of incentives, achieving a “just transition” from fossil fuels to clean energy has proved extremely difficult.
Hard times for private equity billionaires
Times are hard for private equity billionaires. The Financial Times reports that the industry is going through one of the toughest fundraising environments, leading them to offer fee discounts and even a slice of their exorbitant management fees. Carlyle, Blackstone, and KKR have all reported a slump in asset sales, even as they gear up for a fresh fundraising cycle this fall. Apollo’s Marc Rowan has called it “the end of an era” and that the firms will have to "go back to investing in the old-fashioned way.” According to Private Equity Climate Risks, moving away from fossil fuel investments is one way to do it.
Small islands lose out on climate finance
A U.K. inquiry has been lambasted by international NGOs for significantly limiting eligibility for Overseas Development Assistance (ODA) at the expense of Small Island Developing States (SIDS). SIDS are a UN-designated group that faces unique vulnerabilities and is at the forefront of climate change. Since ODA eligibility is determined by GDP per capita, which means some SIDS miss out, advocates are pushing for vulnerability—which will likely reduce GDP—to be taken into account. Watch this video from the Alliance for Small Island States to learn more about the Multidimensional Vulnerability Index, a solution to address this financing gap.