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.
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.