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Climate change is a significant geopolitical risk that can affect global stability. Extreme weather events, such as Cyclone Freddy, which ravaged southeast Africa in 2023, and the devastating wildfires in Los Angeles in 2025 are two examples among many in recent years that caused substantial loss of life and economic damage. Earth’s average surface temperature was the hottest on record in 2024, according to NASA.
Aside from these destructive events, the effects of climate change, such as resource scarcity, food insecurity and population displacement, can lead to heightened geopolitical tensions among countries.
Climate hazards, such as hurricanes, drought, floods and wildfires, can also disrupt supply chains and impact infrastructure, leading to economic instability that can contribute to geopolitical instability.
The Paris Agreement on climate change is an example of how geopolitics can facilitate global cooperation to address the issue. This treaty, signed in 2015, is a legally binding accord between 196 countries to limit global warming to well below 2 degrees C above preindustrial levels.
However, geopolitics can also hinder efforts to address climate change.
Below, we discuss climate risk and sustainability to better understand their relationship with geopolitical risk.
Climate change is one of the most impactful global challenges of our time. The climate challenge cuts across environment, government, business, finance and health.
As the effects of climate change continue to intensify, understanding climate-related risks and developing strategies for mitigating those risks have become top priorities for businesses, governments and communities around the world.
Climate-related risks are the potential negative impacts of climate change on businesses, governments and society. Climate risks include physical risks — rising sea levels and damage to infrastructure and property from extreme weather events — and transition risks, which are associated with the shift to a low-carbon economy.
Climate change directly impacts physical assets, such as buildings, infrastructure and natural resources. Physical risks include many hazards that lead to damage, including extreme heat, water stress, drought, pluvial floods, landslides, wildfires, fluvial floods, tropical cyclones, and coastal floods or rising sea levels. Climate scientists have connected the increasing frequency and severity of these hazards with anthropogenic, or human-caused, global warming.
These are risks associated with transitioning to a low-carbon economy, such as changes in energy prices, shifts in consumer behavior, the development of new technologies, or changes to regulation and policy that could lead to the devaluing of certain kinds of assets, such as coal mines or power plants. Climate change transition risks can impact businesses and industries that rely heavily on fossil fuels, as well as those that have not yet fully adapted to the energy transition.
Businesses that fail to address climate change may face lawsuits and fines from issues such as failing to reduce greenhouse gas emissions or causing environmental damage. Liability risks can be particularly significant for businesses operating in industries with a high environmental footprint, including energy, transportation and agriculture.
New regulations, policies and taxes related to climate change can affect a company's operations and profitability. Regulatory risks can impact businesses across a range of sectors, from energy and manufacturing to finance and insurance.
Climate change is expected to have wide-ranging impacts on worldwide water availability, necessitating that countries adapt their resource management strategies. This will pose significant physical climate risks and economic consequences for governments and businesses, including limitations on electricity generation, agricultural losses and disruptions in supply chains.
According to research by S&P Global Sustainable1, water stress and drought frequency will intensify in numerous regions in the coming decades. As a result, water will assume greater strategic importance.
The impact of climate change is putting pressure on logistics networks. Some regulatory measures seek to reduce emissions from shipping, which could raise transportation costs. Meanwhile, unpredictable weather patterns are disrupting port operations and affecting shipping routes and inland transport.
Persistent below-average rainfall in Panama has contributed to a long-lasting drought in the region. This resulted in low water levels in the Panama Canal from June 2023 through May 2024, which restricted the size and number of ships able to cross the canal and impacted global shipping, according to World Weather Attribution(opens in a new tab).
Regulatory action is leading to more sustainability-related scrutiny on supply chains in general. Regulations such as the EU’s Corporate Sustainability Due Diligence Directive is driving companies to monitor their supply chains for climate and human rights-related risks and requires them to mitigate those risks.
Droughts and water stress can significantly impact agricultural production and pose challenges for policymakers in maintaining food prices. International conflict can exacerbate already-vulnerable food production chains. Russia’s invasion of Ukraine — a major exporter of grain crops — caused ripple effects throughout global food supply.
To provide the more granular assessments that investors are seeking on the impact of climate change, an integrated approach that combines climate and economic modeling can assess and quantify the financial implications of physical climate risk. Climate scientists at S&P Global Sustainable1 are collaborating with economists at S&P Global Ratings to better understand how climate impacts have macroeconomic effects. Recent research from these teams finds that climate is one of many risks facing investors and should be assessed in a broader context since political, economic and financial risks often take higher priority in the near term.
Our research has also analyzed how the trajectory of climate change could impact national GDP globally.
Using drought as an example, we found that far less GDP is exposed to drought conditions under a climate change scenario in which there is strong emissions mitigation — a scenario in which countries and companies take strong action to reduce greenhouse gas emissions and the global average temperature increase is limited compared to a scenario where less mitigation occurs.
Global climate models (GCMs) are used to predict various climate variables, such as temperature, precipitation, sea-level rise and soil moisture. Due to the need to run the models and provide output on a global scale, the GCM provides results at a coarse resolution.
To achieve this, the models use grid cells that are several thousand square kilometers or more in size, sacrificing grid size for the ability to model all the Earth's processes. Consequently, GCMs may not account for local features such as mountains and, in some cases, cannot model the effect of these features on variables such as precipitation because the mountains may fall within a single grid cell.
Regional climate models (RCMs) are useful for assessing the impact of climate change at a more local level. They can use the output of global climate models and apply various techniques to downscale their results, incorporating regional and local features that may affect weather conditions. This allows RCMs to provide much more detailed information for specific regions.
Hazard models developed by S&P Global Sustainable1 are based on the latest generation of climate model data, known as CMIP6. CMIP stands for the Coupled Model Intercomparison Project, the global climate science community’s framework for aligning climate models, experiments and data, and CMIP6 was developed in support of the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). Downscaled CMIP6 datasets provided by the NASA Earth Exchange significantly improve the resolution of analysis for many hazards. CMIP6 uses more models, has broader climate sensitivity and includes new scenarios compared with the previous generation.
Financial institutions are increasingly factoring climate risk into investment strategies:
This trend has been especially noticeable in fixed-income markets. Investors in government bonds increasingly want thorough climate risk assessments before committing their money. As S&P Dow Jones Indices researchers have observed, large institutional investors are actively seeking ways to measure and manage their carbon exposure while still fulfilling their responsibilities to clients and meeting their investment objectives.
Beyond managing a portfolio’s emissions, asset managers and fixed-income investors can consider the risks posed by physical climate hazards in the countries or regions their portfolios are exposed to. This physical climate risk could also have a compounding effect on geopolitical risk exposure, depending on the country or region in question.
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. Different physical risks will be more relevant to each of these places than others. Exposure to Japanese sovereign debt, for example, would entail greater exposure to tropical cyclone and fluvial flooding hazards, whereas French agriculture, advanced manufacturing and river transport face rising exposure to severe drought in central and southern regions of the country.
The UN’s annual climate change conference held in November 2024, known as COP29, saw negotiations shift toward implementing practical financial mechanisms to achieve climate goals. Ahead of COP29, discussions focused on the critical role of financial institutions in advancing climate initiatives. Marina Severinovsky, head of sustainability North America at Schroders, emphasized this point in an interview with the "All Things Sustainable" podcast: "On net-zero and nature positive transition, we're looking for establishment of policies at an industry and sector level that support transition and unlock private investment and, importantly, the integration of nature into national government targets and sector transition plans."
Research from S&P Global Sustainable1 shows that the financial sector has a long way to go toward offering enough climate or sustainability-related financing, however. Transparency into banks’ and other financial institutions’ lending practices related to sustainability financing is low. Based on data collected in the S&P Global Corporate Sustainability Assessment, an annual framework for measuring corporate performance on many sustainability topics, most assessed banks do not offer sustainability-focused corporate finance products. Of the ones that do offer these products, only about half disclose a breakdown between sustainability-linked loans versus green, social or sustainable loans.
COP29 was a watershed moment for carbon markets, especially for global climate action. The conference successfully resolved long-standing challenges surrounding Article 6 of the Paris Agreement. S&P Global Commodity Insights indicates that this represented a crucial step toward establishing a functional global carbon market framework.
Among the most significant achievements was the approval of comprehensive rules for the UN-led carbon market under Article 6.4. This new framework establishes:
Climate finance experts at the conference noted that these rules provide the necessary foundation for scaling up international carbon trading while maintaining environmental integrity.
A particularly noteworthy development was the carbon trading mutual recognition agreement signed between Indonesia and Japan. This bilateral arrangement demonstrates Article 6.2's practical implementation and serves as a model for future international collaboration. The agreement sets a precedent for how countries can work together to achieve their climate goals while maintaining market integrity.
Nations around the world face the need to finance infrastructure hardening and other adaptation projects because of the increasing frequency and magnitude of climate-related disasters.
Progress was seen at COP28, the annual UN climate conference in 2023, with the activation of the loss and damage fund, which developed countries agreed to contribute to in order to help developing countries cope with the effects of climate-driven damages. Physical impacts from climate change are often more severe in countries that have contributed the least to historical emissions.
A year later, at COP29, a broader New Collective Quantified Goal on Climate Finance (NCQG) was agreed to. The NCQG set targets of raising the finance goal for developing countries to $1.3 trillion annually by 2035, with public and private sector sources of funding included in that goal.
Creative “blended finance” mechanisms are gaining traction as market participants increasingly recognize that collaboration among financial institutions, philanthropy, multilateral banks and public finance can create investment opportunities with reduced risk and attractive returns.
The need for financing climate adaptation has grown clearer over time. Projections of the financial impact of climate change on countries and companies show that some amount of physical risk is inevitable over the coming decades due to the amount of global warming that has already occurred. Climate change mitigation remains essential because bending the curve of global warming downward will help reduce future physical climate risks — but adaptation and resilience must become a greater priority to blunt the effect of risk that cannot be avoided. Research by S&P Global Ratings has found, however, that less than 10% of global climate financing goes toward adaptation.
Investing in adaptation can have significant financial benefits. A study conducted by S&P Global Sustainable1 and GIC found that several readily available adaptation measures in the real estate sector could offset physical hazard costs by more than the measure’s cost. For every $1 spent on wet and dry floodproofing, for example, a property owner could reduce the cost of flooding hazards by $3.55, the study found.
Climate change presents a significant challenge to the global community, and its impact is being felt with each passing year. The financial sector has a crucial role to play in helping to mitigate the risks of climate change, and many central banks and financial institutions are taking action to address this critical issue.
However, much work remains to be done, and all major players from various industries must continue to build on the progress achieved so far. By working together and adopting a comprehensive, collaborative approach, a more sustainable and resilient future can be realized for future generations.