Viewpoint: Environmental Debt Risk Is Bigger Than Japan’s GDP

The financial risk posed to companies by natural disasters keep growing and growing, and the size of potential losses is just eye-popping.

Moody’s Investors Service says 18 sectors have a combined $7.2 trillion of debt with “high inherent exposure to physical climate risks,” such as devastating wildfires, storms and other calamities. To put that number in perspective, only two countries have a gross domestic product that’s larger: the U.S. and China. Japan, the world’s third-largest economy, has a GDP of about $5 trillion.

For Moody’s, environmental considerations are becoming increasingly relevant when assessing credit quality. “The increased frequency and severity of extreme weather events are causing significant economic losses, hazards for the local population and environmental damage,” the analysts wrote in a 53-page report published last month. Moody’s doesn’t identify the companies or nations that are most at risk—instead, it chose to focus on different business sectors.

The bottom line, however, is that fixed-income investors stand to lose money if climate change hits physical assets hard enough to undermine a company’s ability to repay debt.

When it comes to environmental vulnerability, seven of the 18 industries evaluated have overall credit scores of “very high or high risk” and the rest have “moderate credit risk,” Moody’s said. The companies with the most at stake have a high concentration of valuable physical assets in what are deemed to be vulnerable regions. Those include coal, oil and gas, chemicals, mining, shipping and unregulated utilities and power companies.

Of those, utilities and integrated oil and gas companies have the most amount of debt that Moody’s tracks. The firm’s analysts said sectors facing “very high or high credit risk” now account for $3.4 trillion of rated debt, up 49% from 2018 and 64% from 2015. In all, Moody’s estimates that credit risk linked to environmental considerations is about $79 trillion.

There’s no doubt that the increase corresponds with global warming. According to the NASA Goddard Institute for Space Studies’ Global Land Ocean Temperature Index, 18 of the 19 hottest years since 1800 have been recorded in the past two decades, a development which has contributed to more extreme weather events including heat waves and catastrophic cyclones.

The U.S. topped the list of countries financially impacted last year by climate change, incurring $60 billion in damages, according to an assessment of insurance claims by Christian Aid, a U.K. charity fighting global poverty. Much of that was caused by an unusually busy Atlantic hurricane season. Altogether, the 30 named storms that struck in 2020 caused at least $41 billion in losses across the U.S., as well as Central America and the Caribbean.

Environmental-related credit risks are climbing as “the transition to a low-carbon economy proceeds apace and the adverse effects of physical climate change become more evident,” Moody’s said. “These developments will be of increasing relevance for global capital markets.”

About the photo: Storm surge from Hurricane Delta hits Sabine Pass, Texas, on Oct. 9. Photographer: Luke Sharrett/Bloomberg