How Does Climate Affect Credit?

The primary impacts of climate change are obvious, from the unprecedented fires in Australia to the melting ice caps in the Arctic. However more observers are starting to consider secondary impacts, and none is less obvious perhaps than the credit worthiness of governments, which is analyzed in a new report from Moody’s, a ratings company.A diverse mix of nations including Vietnam, Suriname, Egypt, and the Bahamas are most vulnerable to a rise in sea levels, according to the report released last week. It said rising seas may cause “lost income, damage to assets, loss of life, health issues, and forced migration,” which could hurt governments’ sovereign ratings.The report was released ahead of this week’s Davos forum, an annual meeting of world business and government officials to discuss the world’s problems. Past themes at Davos include populism and globalization. The theme is climate change at this year’s Alpine forum, where climate activist Greta Thunberg and U.S. President Donald Trump have clashed on the issue’s impact on business. The irony is not lost on observers that officials are getting to the forum by air travel, a key source of climate-changing emissions, in order to discuss climate change. Not often represented at the forum are the vulnerable nations named in the Moody’s report.“Vulnerability to extreme events related to sea level rise can also undermine investment and heighten susceptibility to event risk, by hindering the ability of governments to borrow to rebuild, increasing losses for banks, raising external pressures, and/or amplifying political risk as populations come under stress,” said Anushka Shah, Moody’s vice president and senior analyst, in the report. “While one isolated shock related to sea level rise is unlikely to materially weaken a sovereign’s credit profile, repeated shocks could do.”Her report, with contributions from Caleb Coppersmith and Natasha Brereton-Fukui, explained the link between climate and credit.Major cities that could be submerged amid rising seas include Amsterdam, according to Moody’s.Credit scoreGovernments, like individuals and businesses, have credit scores that affect how much interest they pay to borrow. “Shocks” may come along because of rising seas, such as floods, storm surges, cyclones, and erosion. Governments have to spend money to recover from disasters and build infrastructure, while at the same time losing tax income as companies go out of business or individuals can’t work. With more money going out and less money coming in, governments risk a hit to their credit ratings.The nations highlighted in the report, along with Bahrain, Benin, the Cayman Islands, Fiji, the Maldives, and others, are vulnerable because of a mix of their location by seas and economic and fiscal strength.They are vulnerable in relative terms, but other nations that are vulnerable in terms of absolute population impacts include Bangladesh, China, Indonesia, and India, the report said. It said credit risks based on climate can vary by nation. The Netherlands, for instance, is at risk of having cities submerged under water, while Japan has physical assets at risk, like buildings and cars.Residents walk down a street in Kyoto, Japan, one of the nations with the most physical assets, like buildings, at risk of climate disasters.Climate change views evolveMoody’s noted three government climate strategies are protection, accommodation, and managed retreat. That is, protection like sea walls, accommodating rising waters with higher bridges and other tools, and pushing people to retreat by living inland away from coasts.The report comes as business views on the climate are changing.Whereas emissions used to be considered a part of doing business, companies now say they can’t survive if emissions keep rising.Microsoft said last week it will spend $1 billion to remove carbon from the air, a dramatic break from past corporate efforts to simply buy carbon offsets. Around the same time BlackRock, the world’s biggest money manager, said it would divest from coal and make climate an investment priority.“A big part of the challenge is that as a society we have not committed sufficiently to reduce emissions,” Microsoft president Brad Smith said in announcing the new company policy, adding: “If we don’t curb emissions, and temperatures continue to climb, science tells us that the results will be catastrophic.”He said the company would also support government policies to reduce emissions. The Moody’s report said there’s not much governments can do about past emissions, whether to protect their credit ratings or their populations. It said past emissions have already locked in a sea level rise of 1.6 meters. However emissions reductions could keep that number from getting even higher, it said.
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