Extreme events such as drought, wildfire and flooding are having material impacts on companies, presenting new risks of default. Can Dun & Bradstreet incorporate this new climate reality into its credit risk scoring?

Climate change poses significant business risks. As it increases, the likelihood of extreme weather events such as floods, hurricanes, heatwaves, and droughts also increases, leading to businesses in areas prone to these events facing significant potential disruptions.

Physical risks associated with climate change can pose serious threats to businesses, affecting their assets, operations, and, thereby, their creditworthiness. These include:

Damage to Physical Assets: Climate change increases the frequency and severity of extreme weather events such as hurricanes, floods, wildfires and droughts. These can physically damage a company's infrastructure, facilities and equipment, leading to costly repairs or replacements. Businesses operating in high-risk areas, such as coastal regions prone to hurricanes or floodplains, are particularly vulnerable. For example, a manufacturing plant might be flooded, damaging machinery and halting production. These direct damages and disruption of operations can result in substantial financial losses, impacting the company's ability to service its debt and increasing credit risk.

Operational Disruptions: Even if a company's own assets are not directly damaged by extreme weather events, such events can disrupt its operations. Roads, ports or airports might be temporarily closed due to a storm, preventing the shipment of goods and causing delivery delays. Prolonged heatwaves can also affect the health and productivity of outdoor workers, potentially leading to slowdowns or stoppages.

Increased Costs: The physical impacts of climate change can result in increased operational costs. For instance, a business might have to spend more on cooling due to rising temperatures, or invest in additional equipment or infrastructure to protect against extreme weather events. A farm might have to invest in more irrigation during a drought or switch to different crops. These increased costs can erode profit margins and affect a company’s ability to service its debts.

Loss of Natural Capital: For businesses that rely on natural resources—such as agriculture, fishing, forestry and tourism—the degradation of these resources due to climate change can have significant financial implications. Rising sea temperatures can impact fish populations, deforestation can harm timber supplies, and loss of biodiversity can deter tourists. These changes can decrease a company's revenues and increase its credit risk.

Insurance Costs and Availability: As the risk of catastrophic weather events increases, insurance companies might increase premiums or refuse to provide coverage for certain risks or in certain locations. This can put further financial pressure on businesses.

These risks, historically, have not been captured in a company’s overall credit risk. Dun & Bradstreet has one of the world’s largest databases of business and credit risk. To improve these credit risk scores, they have begun to leverage SpatiaFi to better understand the potential financial impacts of climate change and how exposed the companies they track are to these new risks.

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In the Media: 

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D&B Announces Partnership for Climate Risk Analytics

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