A Climate Reckoning Is Coming for the World’s Government Debt

For years climate scientists have warned about the ferocious wildfires and hurricanes that are now overwhelming many communities. Today alarms are ringing about a related financial danger: risks lurking within government bonds, the biggest part of the global debt market.

A growing number of investors, academics, policymakers, and regulators are questioning whether credit ratings—the ubiquitous scores that underpin much of the financial system—are accounting for the impact that extreme weather events and policy changes related to global warming will have on borrowers. Once those risks materialize, they threaten to trigger the kind of sudden, chaotic asset collapse described by the late economist Hyman Minsky. The effects would sweep through pension funds and the balance sheets of central and commercial banks.