Sovereigns At Risk: Lots Of Capital In Vulnerable Spots

By Dharisha Mirando 24 November, 2020

Highly concentrated assets in increasingly vulnerable coastal areas puts APAC sovereigns at risk – find out who’s made it into CWR’s watchlist

APAC at risk due to high concentration of assets and people along vulnerable coastlines; 200mn+ people reside in and US$5.7trn of GDP is generated annually from just 20 APAC coastal capitals & economic hubs
Government adaptation action disappoints – high risk cities and richer cities not doing the most; Japan, Taiwan, Hong Kong & Macao are on our watchlist as they warrant being re-rated
Central banks & financial regulators are starting to take action - don’t get caught out, catch up on their latest action & use our simple 3-step guide to waterproof APAC

APAC is the most vulnerable region to coastal threats because disproportionately more of its people; thus, economic activity is located along the coast, which is also highly susceptible to rising physical coastal threats. Stats from just the 20 APAC cities in the CWR APACCT 20 Index, which are all at risk from coastal threats, gives you an idea of how this concentration of assets could put sovereigns at risk:

  • US$5.7trn of GDP generated annually; more than the GDP of Germany & Canada combined;
  • Cities make a significant contribution to their own country/territory’s GDP – from around 20% to 100%;
  • Account for a quarter of global sea and air cargo volumes and all have significant trade-to-GDP ratios, yet almost all ports & airports will be permanently submerged by sea level rise;
  • Seven stock exchanges in the 20 cities account for US$29trn of equity trading value in 2019 compared to NASDAQ’s US$16trn;
  • 16 large banks by market capitalisation in the region have 66% of their loan books clustered in five vulnerable locations; and
  • Savings at risk as APAC stock indices are heavily skewed towards finance, trade/manufacturing and real estate, which are all vulnerable to coastal threats.

Unexpected (in)actions warrant sovereign re-rating

Government action to tackle the risks from climate change can protect cities and alleviate the pressure on corporates and investors. But some are doing more than others and so rank differently in the CWR APACCT 20 Index.

Our analyses of the 20 cities in “Sovereigns at Risk: APAC Capital Threats” show that there are many cities with no-sense climate strategies – high GDP cities and cities facings the highest physical risks are not doing the most as one would expect!

 “We have put Japan, Taiwan, HK & Macao on our watchlist as they warrant being re-rated”

Our analyses led us to put Japan, Taiwan, Hong Kong & Macao on our watchlist as they warrant being re-rated. Their lacklustre adaptation actions, despite higher levels of exposure to coastal threats, leaves significant GDP and residents exposed.

Get ahead of the regulators & take action today

Most haven’t connected all the dots, so capital continues to flow to vulnerable locations even while ongoing investments in carbon intensive industries worsens vulnerabilities.

But financial opinions are starting to sway – the 100+ finance experts we surveyed for the CWR APACCT 20 Index thought that long-term sea level rise (SLR) and storm surge risks should be factored into sovereign and credit ratings as well as equity & project valuations. These experts ranged from chairs/directors of bank boards to credit/equity research analysts – see who they are here.

And now central banks & financial regulators are starting to act because they acknowledge that climate change is a source of financial risk. In 2020 alone, NGFS, a group of over 68 central banks & supervisors, has so far released seven reports pertaining to these risks. Don’t get caught out by their action – read our summary of their latest reports as well as what the wider financial sector is doing – click on the image on the right to see more.

It’s time to take action before the regulators make you, so:

  1. Read “Sovereigns at Risk: APAC Capital Threats”; and
  2. Follow our simple 3-step guide to waterproof your assets/portfolios/cities/territory/country/region.

If you’re in “advanced mode”, dive into the index methodology and rankings plus learn how to build coastal threat scenarios to assess what’s at risk in more detail.

CWR Coastal Capital Threat Series

  • The CWR Survival Guides to Avoiding Atlantis – Sea levels can be 3m by 2100, putting urban real estate equivalent to 22 Singapores underwater in just 20 APAC capitals & cities. With US$5.7trn of annual GDP at stake, get on top of the new risk landscape to survive
  • Surviving Rising Seas – 20 APAC Cities: Who’s ahead & Who’s Behind? – The homes of 28mn to 100mn+ residents could be submerged in just 20 APAC cities. Which cities are more prepared? We walk you through the Top 5 Most Proactive & the Bottom 5 Laggards in our CWR APACCT 20 Index
  • CWR APACCT 20 Index – Finance Sector Input On Methodology – Coastal threat assessment can be complex & daunting, so we did the heavy lifting by creating the index. But we did not do this alone – 100+ finance experts helped. See who they were & how feedback shaped the index
  • Existential Coastal Threats: 8 Things You Must Know – Rapid SLR will happen sooner than we think, yet we are still driving investments to vulnerable locations. CWR’s Debra Tan shares 8 things you need to know about the existential threat from SLR – from glaciers in the mountains to ice sheets in our poles, permafrost + more

Further Reading

  • Future SLR Projections & Biggest Worries – In this follow up interview, HKU’s Dr. Nicole Khan shares her biggest concerns on how future SLR projections are rising higher & faster than thought & shares the best approach for building realistic scenarios
  • It Happened – Central Banks And Water Risks – Half a dozen new reports by the NGFS means that CWR has achieved a key milestone in embedding water risks in finance. Debra Tan and Dharisha Mirando expand on these game-changing moves by the central banks. The credit evolution has started
  • Capital Threats Remain Post COVID – There is no vaccine for climate & water risks, yet some in the financial sector are still burying their heads. CWR’s Dharisho Mirando reminds us how our capital is at risk & steps we can take to reduce them while going green
  • Asia, Why On Earth Would We Leave Our Future To G7? – With G7’s absent leadership & inability to plan for pandemics, CWR’s Debra Tan calls for Asia to step-up & lead the global fight against our climate crises. Tycoons, think about it – what’s the point of building empires that will kill your grandchildren?
  • Thirsty And Underwater: Rising Risks In Greater Bay Area – How will water & climate risks, including rising sea levels & droughts, threaten the already water-stressed Greater Bay Area (GBA)? CWR’s Tan & Mirando explain in their latest CLSA report and highlight companies’ failure in climate risk disclosures
  • No-Sense Climate Strategies: From DSD To HSBC – Hong Kong’s shortsighted & unrealistic climate plans will leave key assets & infrastructure exposed that mean the government, companies, investors and the public are even more exposed. China Water Risk’s Dharisha Mirando & Debra Tan expand
  • Are Asia’s Savings Exposed To Water & Climate Risks? – Asian asset owners have portfolios skewed towards domestic markets that will bear the brunt of climate change. Find out about these risks and what to do as our Dharisha Mirando shares key takeaways from the new report China Water Risk co-authored with Manulife Asset Management & the Asia Investor Group on Climate Change



Dharisha Mirando
Author: Dharisha Mirando
Dharisha Mirando hails from the finance industry and joined CWR as she believes that climate and water factors are downplayed by the sector despite being significant investment risks. To tackle this, her ambition is to help build consensus, bridge the gap between finance and science, and engage with investors to incorporate these risks into their due diligence and portfolio management. This could in turn lead to innovative Green Finance instruments becoming more prevalent. She has already made strong headway as the lead author of a recently published report with Manulife Asset Management and the Asia Investor Group on Climate change, which highlights the imminent threats to Asian asset owners' portfolios from climate and water risks. Dharisha has also undertaken a number of speaking engagements on these pressing issues at investor and insurance conferences. Prior to joining CWR, Dharisha worked for a long-only public equities fund. She has also worked in the impact investment space in London and Singapore where she provided technical assistance to social enterprises, helped them raise equity investments, and managed a debt portfolio.
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