Global warming could trigger a spike in government borrowing as more countries face credit rating downgrades, new research has found.
Climate change is expected to drive up sovereign debt levels, with the UK facing a debt-to-GDP ratio of 114% and the US burden rising to 151% by 2050, according to new research by Ortec Finance. The Rotterdam-based data provider, which for the first time considered the impact of physical climate risk on sovereign debt holdings, predicts nations will increasingly struggle with rising costs from extreme weather events and climate tipping points.
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These factors will lead to sharp and lasting declines in GDP and reduced tax revenues, the research indicates.
"The adverse impact of climate change on global GDP, levels of insurability and ultimately the ability of governments to plug funding gaps through sovereign debt markets has been an important missing link in the total portfolio assessment of climate risk," said Maurits van Joolingen, managing director for Climate Scenarios & Sustainability at Ortec Finance.
"Climate risk is a systemic issue, but it doesn't affect all regions equally, necessitating a regional approach to investment strategies and sovereign debt portfolios, especially given their long maturities. It's important for pension funds to evaluate how physical and transition climate risks influence national GDP, debt-to-GDP ratios, insurability and ultimately interest rates."
Ortec also warns that private market investors remain even more exposed to physical climate risks due to the inherently illiquid nature of the asset class.
The extent of losses depends on climate mitigation steps taken now, with a high warming scenario leading to significantly higher losses. Over the next 15 years, private infrastructure investors in the US could lose about a third of their returns under a limited action scenario where temperatures increase to 2.8°C by 2100.
However, in a high warming scenario with global temperatures rising to 3.8°C by 2100, investors could see approximately 60% of future returns wiped out, the firm warned.
"The results of our 2026 scenarios highlight the widespread impact posed by rising physical climate risks, and how this systemic influence affects insurability—a growing concern among investors," said Sophie Heald, senior climate specialist at Ortec Finance. "With physical risks remaining insufficiently priced in across all asset classes, investors who understand these climate-induced risks have the ability to access first mover advantage through realistic and comprehensive climate risk assessment derived from plausible, robust scenarios."
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