Country and subnational exposures to extreme weather events and chronic climate hazards represent clear financial risks to holders of sovereign and corporate debt. The frequency and intensity of climate hazards such as extreme heat, water stress, drought and tropical cyclones are projected to continue rising globally, with lower income regions facing the greatest increases in hazard exposures, compounded in many cases by greater vulnerabilities, financial resource constraints and limited adaptation readiness. 

The financial materiality of climate-related exposures to sovereign and corporate debt instruments is significant. S&P Global Ratings has estimated that up to 4.4% of world GDP could be lost on an annual basis, absent adaptation, in a slow transition scenario in which global temperatures rise by 3.6 degrees C (a range of 2.8 degrees C to 4.6 degrees C) by the end of the century. Even under a more robust mitigation scenario, climate physical risk costs for the world’s largest companies in the S&P Global 1200 could reach $1.2 trillion annually by 2050 (assuming no adaptation and not adjusted for future inflation). 

S&P Global’s Physical Risk: Country and Subnational dataset provides climate hazard exposure metrics for 201 countries and nearly 2,100 subnational regions associated with 120 of those countries. This data captures the most economically relevant geospatial climate data by estimating GDP-weighted absolute and relative frequency exposure metrics for key climate hazards. The relative importance of climate hazards to a specific location is represented by the percentage of GDP and percentage of population exposed to a given hazard. In this blog, we highlight how financial sector decisionmakers such as asset managers, investors and lenders can use this dataset to evaluate their portfolios, consider potential future investments and report on climate-related risks, including for private companies where detailed information is sparse.

For asset managers and investors, the country and subnational dataset supports portfolio analysis to identify climate exposure hot spots and the most salient climate hazards. The data also informs an assessment of portfolio climate risk trends, in terms of both materiality and escalation. Finally, given uncertainty as to future climate trends, the dataset enables an investor or manager to evaluate how portfolio exposure will differ under a range of climate change scenarios. 

For example, consider a hypothetical portfolio of sovereign debt of the same maturity from five equally weighted countries representing geographic exposure from North America, South America, Europe, Asia-Pacific and Africa. The chart below provides combined and individual hazard exposure scores for the 2020s and 2050s under the SSP3-7.0 climate change scenario, which is a moderate-to-high emissions scenario akin to a slow transition.

An assessment of this portfolio could begin with a top-down assessment of its overall exposure profile, identifying the greatest climate hazard exposures and their materiality, and the evolution of exposures within the holding period: 

• This portfolio faces moderate hazard exposures that substantially increase over the next 30 years, marked by a rise in the frequency and materiality of drought and pluvial (rainfall-driven) flooding, and to a lesser extent water stress, as well as a pronounced increase in fluvial (river-based) flood frequency. 

Individual countries or subnational regions may have distinctive hazard exposure profiles. Hazard intensification within the holding period could magnify concerns regarding specific issuers, potentially warranting portfolio rebalancing.

• Of the five countries, Uruguay is the least exposed to these physical hazards overall in the 2020s-2050s, although pluvial flood frequency and materiality rises the most, with one-third of the population projected to be exposed to a 2% annual likelihood of pluvial flooding by the 2050s.

• Drought conditions are projected to rise rapidly in frequency and materiality in France, where more than 40% of GDP is expected to experience a high level of water stress by the 2040s. In the south and southeast of the country, increasing frequencies of extreme heat and drought may amplify the impact of more frequent wildfire conditions.

• Nearly half of South Africa’s GDP is projected to be exposed to high water stress and elevated wildfire conditions in the 2020s-2050s while the frequency and materiality of drought conditions is projected to accelerate in the 2050s. 

• Canada’s key challenges are rising fluvial flooding frequencies (in British Columbia, Atlantic provinces, Ontario and Quebec) and to a lesser extent drought conditions (in Prairie provinces). Despite projected rising wildfire severity, major economic centers are not expected to sustain high direct exposures to wildfires due to their prevalence in remote areas. However, substantial indirect impacts could occur, such as respiratory or cardiovascular health effects from inhalation of smoke lofted from distant fires.

• Japan alone is projected to face full GDP and population exposures to Category 3 or higher tropical cyclone landfall in the 2020s-2050s time frame, coupled with rising frequencies of fluvial and pluvial flooding. While the likelihood of major tropical cyclones remains stable regardless of climate scenario, greater intensity and slowed speed of passage upon landfall could exacerbate compounding pluvial and/or fluvial flood exposures and impacts.

With hazard exposures identified, the portfolio assessment could turn to analysis of the major economic, fiscal, and social vulnerabilities of key issuers. The portfolio manager could also consider the quality and implementation of physical risk adaptation and resilience measures to reduce the potential impacts of hazards.

• In France, rising exposure to severe drought conditions in central and southern regions poses substantial challenges to agriculture, advanced manufacturing and river transport. The Organisation for Economic Co-operation and Development recently estimated a major drought in Île-de-France alone could cause €2.5 billion in losses by 2050. France’s 2023 freshwater management plan, which targets increased efficiency and improved water management governance, defines a collaborative strategy with local governments — yet one whose implementation will critically depend on political will and funding.

• In South Africa, high water stress could lead to water supply interruptions for key sectors including agriculture, mining, food manufacturing and power generation, alongside diminished economic investment and potentially high costs for human health and communities. Communal demand reduction helped avert Capetown’s “Day Zero” water stoppage in 2018. However, national and local governments first need to coordinate on water governance and complete major infrastructure investments and upgrades before adaptation measures targeting efficient consumption and provisioning can be pursued, with high municipal indebtedness also posing a major barrier to adaptation implementation.

• Japan’s vulnerability to rising intensities of compound tropical cyclone and flood events also reflects high densities of economic activity, infrastructure and population in coastal clusters, as well as substantial trade and supply chain dependence on North and Southeast Asian nations that have similar climate exposures. Japan’s adaptation approach has evolved from a focus on structural investments (e.g., super-levees, urban rainfall storage, seawalls) to a data-driven, nationally mandated yet locally implemented strategy that also incorporates early warning systems and community education, nature-based solutions, support for private adaptation innovation, and providing adaptation assistance to Asia-Pacific trade partners.

A portfolio manager could also assess the uncertainty inherent in hazard exposure forecasts or whether other developments in issuer vulnerability could warrant portfolio rebalancing.

So far we have provided summary analysis of:

• material exposures for the portfolio 

• hazard exposures for individual countries in each decade 

• identification of issuers facing compound exposures.

For financial reporting uses, the above provides a starting point for the disclosure of climate physical risk monitoring and oversight; portfolio metrics, targets and management; and overall risk governance. This is useful for both internal and external reporting on financial exposures to climate physical hazards, such as for the disclosures required by the IFRS S2 standard developed by the International Sustainability Standards Board. A more quantitative reporting assessment could model the credit implications of sovereign or subnational economic, fiscal or demographic vulnerabilities; adaptation investment; compound hazard exposures; and portfolio geographic and hazard correlations. 

S&P Global’s country and subnational data can also be used as a geographic climate exposure proxy for entities for which asset-level data is not available, such as private corporate investments and loans. Similarly, subnational data can be used to assess mortgage portfolios for which addresses are not provided. Finally, detail on the nature, timing and materiality of climate hazard exposures is also valuable for decisionmakers such as reinsurers that seek to assess the longer-term climate exposures of multiple regional markets.

Further reading

• For the world’s largest companies, climate physical risks have a $1.2 trillion annual price tag by the 2050s

• S&P Global's Top 10 Sustainability Trends to Watch in 2025

• Integrating Climate Adaptation into Physical Risk Models

• Hot Spots: Subnational Regions Outside The US Face Rising Physical Climate Risks

• Lost GDP: Potential Impacts Of Physical Climate Risks

This piece was published by S&P Global Sustainable1 and not by S&P Global Ratings, which is a separately managed division of S&P Global.