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Climate stress reaches sovereign ratings and factory cash flows

Two analyses connect physical climate stress to credit risk: AIIB sees sovereign downgrades under current policies, while Moody's flags water-dependent US facilities whose cash flows may erode.

Economics & Markets··Morning
A water-dependent factory overlooks an exposed intake pipe and pale high-water marks as the reservoir recedes along a dry shore.

A third of sovereign borrowers under current policy

The Asian Infrastructure Investment Bank's analysis finds that about 34 per cent of its sovereign borrowers could face credit rating downgrades by 2050 if climate policies stay as they are. That path is the one in which global temperatures rise by about 2.9 degrees Celsius above pre-industrial levels. Under a Paris-aligned path that holds warming to 1.5 degrees Celsius through rapid decarbonisation, the share of borrowers at risk of a downgrade falls to 11 per cent. The bank says rating effects would not appear at once. Physical climate damage accumulates with a lag, so the first visible pressure on sovereign ratings is expected between 2035 and 2040. Rising sea levels, extreme heatwaves and severe flooding are listed as the main physical risks, and developing economies that depend on nature-based industries sit at the sharpest end of that exposure. Without extra carbon pricing, rising carbon dioxide emissions are said to deepen the long-term economic hit from climate-driven catastrophes on sovereign balance sheets.[1]

Heat and water on the factory map

A separate Moody's analysis maps the same physical stress onto factory cash flows and asset values in the United States. Of about 159,000 water-dependent facilities in the sample, roughly 49,000 are expected to face high or very high water stress in the coming decades. Most of those sites sit in Texas and California, and 60 per cent are heavy manufacturing or processing plants. Moody's says extreme heat and water scarcity are already eroding values and cash flows across real estate, agriculture, apparel manufacturing, semiconductor production, food and beverage, and mining and quarrying. Managing director Mohsen Rahnama said heat and water are no longer separate perils on separate timelines and are converging quickly. He also said losses from heat and water stress build slowly, are hard to model with precision, and tend to strike many policyholders in one region at the same time.[2]

References

  1. News sourceSouth China Morning PostA development bank counts a third of its own borrowers at risk of a downgrade↩
  2. News sourceTaipei TimesHeat and water shortage met on one map: 49,000 plants at risk↩
Chip wars and the supply chainRussia-Ukraine warCentral banks and the rate cycleEnergy transition and climate

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