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October 7, 2021

Global exposure to physical climate hazards calls for urgent adaptation investment

We have just witnessed a season of extreme events across the globe, with damaging floods in Europe and devastating wildfires and severe storms in the US and elsewhere. These extremes, alongside the recent Intergovernmental Panel on Climate Change (IPCC) sixth assessment report, underscore the reality that the physical effects of climate change are largely locked in over the next few decades.

While it remains important to accelerate decarbonization efforts to avoid the worst impacts of climate change, there is an urgent need to prepare economies and communities for increasing climate extremes. Furthermore, investors and lenders need to understand their risk exposure to specific hazards and the opportunities arising from investing in resilience.

A new dataset from Moody’s ESG Solutions, provides forward-looking, population-weighted data on global exposure to floods, hurricanes & typhoons, heat stress, sea level rise, water stress and wildfires. The dataset includes US municipal data at the state, county, urban area, metropolitan and micropolitan statistical areas, and zip code level; EU coverage for all three subdivisions of countries (NUTS 1, 2 and 3); and coverage of global states, provinces and 3,300 urban areas. This granular dataset shows that physical risk is ubiquitous. Every region is exposed to some level of physical climate risk.

In the US, we find that 32% of counties have high exposure to wildfires looking out to 2030-2040. In Europe, 20% of NUT 3 areas, which consists of smaller regions, are highly exposed to floods. And globally, our data shows that 32% of states and provinces are highly exposed to water stress. These hazards cause multifaceted impacts, from supply chain disruption and asset-level damage in the case of floods and wildfires, to impacts on public health and food security from water stress.

Elevated risk exposure also brings the need to invest in resilience, which presents opportunities. However, according to the Climate Bonds Initiative, only 1% of green bonds’ use of proceeds have been allocated to adaptation projects in 2021 to date, showing that there is a need to drastically scale up resilience financing. A more thorough understanding of physical risk exposure and its economic impacts will help markets quantify the opportunity in resilience investment and increase adaptation finance.

One group addressing this need is The Coalition for Climate Resilient Investment (CCRI), a private sector initiative committed to building climate resilience by promoting an efficient integration of physical climate risks into investment decision-making. Moody’s has joined 95 other members in this group including lenders, institutional investors, insurance, engineering & construction, governments, NGOs and others.

Infrastructure is a key asset for resilience investment, with its critical role in supply chains, economies and communities, and the CCRI is working to address key challenges identified across the infrastructure investment lifecycle. The coalition will develop tools to help sovereigns and municipalities prioritize resilience investments within infrastructure portfolios, create a framework to integrate physical climate risk considerations into asset design and cash flow modeling, and create innovative capital market instruments combining insurance and credit risk to reward projects that integrate climate resilience into their design.

Through our data and analytics, and collaboration with global partnerships such as CCRI, we are committed to enabling a more consistent integration of climate resilience into the investment and lending decision-making of global companies and financial institutions.