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Markets in Motion

Richard Mattison

CEO, Trucost, part of S&P Global

“Our latest research shows that 60% of S&P500 companies, with a market capitalisation of $18 trillion, hold assets that are at high risk of at least one type of climate-related physical event. It’s critical that companies fully understand their impact and dependency on ecosystems as well as the impact of a changing climate on their business operations. Trucost recently launched its Climate Change Physical Risk Analytics with the aim of helping companies and investors understand their exposure to a range of physical risks at the asset level including floods, droughts, wildfires, heatwaves and extreme weather events.”

The Trucost Climate Change Physical Risk dataset

Original Davos Research

The Big Picture on Climate Risk

While the extent and effectiveness of the global response to climate change remain uncertain, one thing is very clear: Companies and investors must prepare for a range of possible outcomes with diverging transition and physical risks.

This need for determined action to reduce emissions and limit the effects of climate change poses important transition risks for companies and investors through regulation, changing market dynamics, and technology, among other factors.

As it stands, companies in the benchmark S&P 500 Index own physical assets across 68 countries globally—and 60% of these entities (with a market capitalization of $18 trillion) hold assets that are at high risk of at least one type of climate-change physical risk. And while corporate-level resilience to both transition and physical risk varies greatly within and across sectors, S&P Global data show that heatwaves, wildfires, water stress, and hurricanes linked to increasing average global temperatures represent the biggest physical risks for companies in the S&P 500.

More than 40% of the world’s largest companies have sites at high risk from the physical impacts of climate change – that’s wildfires, water stress, heatwaves and hurricanes among others. For U.S. companies this rises to almost 60%.
Find out:
  • How physical climate risks can be tracked across corporate operating sites and supply chains – as well as the financial portfolios of investors, banks and insurers
  • How these risks can be managed alongside transitional climate risks such as intensifying carbon pricing regulations 
  • How to develop climate risk targets that align with global climate goals

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Environmental, Social, And Governance

Delays In Addressing Global Warming And The Longer-Term Ratings Implications

S&P Global Ratings' look-back reviews published in 2017 and 2018 show that climate risk materially influenced less than 10% of our rating actions in recent years. Recent climate-related rating actions have typically stemmed from either physical risks, such as the 2018 wildfires in the case of Pacific Gas & Electric in the U.S. and Hurricanes Harvey, Irma, and Maria affecting reinsurers and local governments in 2017; or disruption to the operating environment in certain sectors. Current global warming trends suggest that the materiality of climate risk for ratings is only likely to increase in the future. The longer the delays in addressing current trends in climate change, the more likely we could see economic and social disruptions, due both to higher physical risks and the need to transition to a low-carbon economy at a faster pace.

What’s the Deal with the 2-Degree Scenario? Under the 2015 Paris Agreement, nearly 200 countries agreed to limit global warming to no more than 2 degrees Celsius by 2100, and to aim for a no more than 1.5 degrees Celsius increase. The 2-degree scenario is widely seen as the global community’s accepted limitation of temperature growth to avoid significant and potentially catastrophic changes to the planet.

Read More about the 2-Degree Scenario


Major economies drag feet as nations gather for climate talks

Of the eight major economies that account for 67% of the world's greenhouse gas emissions, only Europe is gearing up to extend its Paris Agreement commitment after the European Parliament announced a climate emergency Thursday.

Incoming European Commission President Ursula von der Leyen is set to call for EU member states to cut carbon emissions by at least 50% below 1990 levels by 2030, up from a current 40% reduction target.

But ahead of the COP25 climate talks in Madrid, climate scientists say around 75% of current national plans are inadequate to put the globe on a path that meets the Paris Agreement's aim of limiting global warming to 1.5 to 2 degrees Celsius.

Key Takeaways

  • According to Robert Watson, former chairman of the Intergovernmental Panel on Climate Change, the world is on a trajectory of 3-4 degrees Celsius warming, with devastating consequences for sea levels, food security and mass displacement of people.

  • Using the World Bank's 2030 average abatement cost of $75/mt for CO₂, the cost of global net zero emissions would be $3.46 trillion, S&P Global Platts calculates.

  • While major economies are yet to commit to extending Paris Agreement commitments, more than 70 countries, 10 regions and 102 cities, including California, New York State, Tokyo and Rio de Janeiro, have committed to work towards net zero emissions status by 2050, according to the UN.


Climate policy could wipe $2.3 trillion off global companies: UN-backed group

Policy changes introduced as economies adapt to climate change could wipe between $1.6 trillion to $2.3 trillion off the value of major global companies by 2025, and investors need to reflect that policy risk in their strategies, according to research conducted for the U.N.-backed group, Principles for Responsible Investment.

According to an analysis by consultants Vivid Economics and Energy Transition Advisors, policy changes would reduce by 3.1% to 4.5% the value of companies on the benchmark global equity MSCI ACWI index, or the equivalent of the total value of the largest 12 to 33 companies on the London Stock Exchange's FTSE100.

The future financial and social consequences of climate change are becoming increasingly apparent to companies, investors and policy makers. Strong action to reduce emissions and limit climate change may avoid the worst physical impacts of climate change but presents significant market, technology and regulatory transition risks for market participants. Conversely, failure to adequately reduce greenhouse gas emissions may limit transition risks but will result in increasing climate change and associated physical risks.

Read more about Physical Risks

Sink or Swim

The Importance Of Adaptation Projects Rises With Climate Risks

Since S&P Global Ratings' most recent review on the matter in December 2018, the need for climate change adaptation projects hasn't abated. Indeed, more people are noticing. We believe the recent surge in damage from extreme climate events has significantly increased the attention of public authorities on the need for investment in this area. According to the reinsurer Swiss Re, 2017-2018 insured losses from natural catastrophes, including climate related events, were $219 billion, the highest 24-month figure on record. In total, economic losses from natural catastrophes totaled $497 billion, with a further $40 billion during the first half of 2019. This implies uninsured losses from natural catastrophes of approximately $280 billion in 2017 and 2018 alone.

Key Takeaways

  • Quantifying the resilience benefits is progressing, as demonstrated by the estimates from the GCA. However, quantifying these benefits remains challenging, and estimates are often imprecise.

  • Given the high needs and benefits for adaptation, the obvious question is why the level of investment is so low. We believe the main factors behind this are the large sums involved and difficulties in demonstrating the value of adaptation to stakeholders, particularly in what timeframe.

  • Adaptation to climate change is a moving target because, by 2050, even countries that have taken action might have to enact additional measures if the 2 degree objective is to be met.

Key Takeaways

  • As investors and companies increasingly weigh climate risk into their investment decisions and strategic direction, the question persists whether regulatory or market-based solutions offer a better path forward.

  • Scenario analysis based on scientific research indicates that climate risk will begin to impact global growth in the near future.

  • An uncoordinated regulatory response creates confusion and doubt in the markets. But market-based solutions are also plagued by inconsistent standards and terminology.

  • S&P Global believes effective and standardized ESG disclosure is needed to foster this growth. This presents an opportunity for governments and regulators to work with market leaders.


Environmental, Social, And Governance: Infrastructure Seeks A Circular Solution To Sustainability

Global infrastructure spending has remained resilient in an environment of financial instability, underpinned mainly by interest from private sector investors. Private investors seeking long-term, stable returns are keen to fund infrastructure projects ranging from energy, to transport, to water infrastructure. These investors are providing support to governments facing a growing infrastructure funding gap. Yet, the sector is now awakening to the threats and opportunities that sustainability brings to realizing this long-term source of finance. Long-term climate risks are unlikely to leave any sector untouched as governments worldwide seek to maintain warming below 1.5 degrees Celsius under the 2015 Paris Agreement. This may force infrastructure projects to address energy use concerns, particularly as urban infrastructure consumes approximately two-thirds of global energy. Further, concerns over the recoupling of resource consumption and economic growth continue to grow. This adds pressure to address the resource-intensity of infrastructure often associated with the "take, make, and dispose" model under the linear economy.

Key Takeaways

  • S&P Global Ratings has considered how pursuing a circular economy strategy could be compatible with the low-carbon transition and may also lead to significant benefits for infrastructure developers and investors.

  • Despite circular innovation's traditional focus on the manufacturing and electronics' sectors, we expect infrastructure investors and projects increasingly to view the circular economy as an effective strategy given the pressures to address the triple bottom line--concerning social and environmental impact beyond financial returns.

  • For investors focused on achieving long-term value creation, the circular economy may be beneficial to realizing increased value upon decommissioning.


Certain perils becoming pricier, harder to cover as climate risks grow

Insurance coverage for some risks is becoming rarer and more costly as climate change alters the risk landscape, according to Zurich Insurance Group AG's chief risk officer.

Speaking to S&P Global Market Intelligence following the release of the World Economic Forum's 2020 Global Risks Report, Peter Giger said certain perils are becoming increasingly expensive, and that while those price increases are justifiable, they are hitting communities affected by climate change.

Key Takeaways

  • Climate change concerns took the five top spots in the World Economic Forum's 2020 list of the most likely global risks over the next 10 years for the first time in the ranking's 15-year history.

  • Climate-related concerns also occupied positions three to five in the ranking of the most severe risks. The issue of extreme weather events and the failure to mitigate or adapt to climate change stood at the top of the list of the most strongly connected global risks.

  • Where risks become uninsurable because of climate change, more of the burden will move away from insurance companies. If, for example, land was rendered infertile by climate change, crop insurance would become ineffective because it would be triggered every year.