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Analysis Shows Financial System Holds $22 Trillion in Debt Under Risk Due to Climate Change

By:
Chris Gaetano
Published Date:
Nov 24, 2021
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An analysis by Moody's has found that the global financial system—which encompasses banks, insurance companies and asset managers—holds about $22 trillion worth of loans and investments in carbon-intensive industries that could rapidly lose value as companies adapt to climate change risk, Bloomberg reported.

As this makes up about 20 percent of their total investments, the analysis said that these companies need to be more serious about transitioning to a low-carbon business model.pr  else face possible loss in the future, which in turn could affect how much credit they will be able to access. This is because there is, on the one hand, growing regulatory pressure for companies to shift into a more climate-friendly mode and, on the other, increased competition from green industries that could, in time, overshadow the more carbon-heavy ones. 

The analysis warned that, as time goes on, these two factors will become more relevant, which puts the financial sector at risk due to how exposed it is to legacy firms that, so far, have taken comparatively little action. Bloomberg noted, for example, that the European Central Bank recently said that only a handful of firms in its jurisdiction have developed carbon transition plans. The Moody's analysis says this will be to their detriment, especially when it comes to borrowing costs, as those companies that have developed a fast but stable climate plan will have lower borrowing costs and those who have failed to do so will face higher ones. 

The countries most exposed to carbon-intense industries are Turkey, Russia, Indonesia, India and China, with these five countries accounting for 75 percent of potential bad loan exposure; those with the least exposure are the United Kingdom, the United States, Germany, France and Australia.