Globally, droughts are becoming more frequent and severe, with research on the economic effects of extreme weather and natural disasters suggesting that droughts are increasingly damaging. The credit rating implications of climate hazards for most of the sovereigns that we rate remain limited, given the manageable costs at the sovereign level. Still, severe droughts affect agriculture, fluvial trade, industry, and energy generation, as the current drought in Europe is demonstrating.
Earlier this year, we introduced our Hazard Exposure Analytics and Trends (HEAT) dataset (Climate Risk Navigator - Physical Climate Risk Signals in Credit: Longitude, Latitude, and Exposure), showing how physical climate risk varies across locations, regions, and time horizons. In this commentary we look at the intensity of recent heatwaves and droughts, their potential economic impacts, and how the stacking of risks calls for further climate adaptation.
KEY HIGHLIGHTS
A series of climate hazards has stacked up this summer, with consecutive heatwaves and dryness leading to droughts in many parts of Europe.
The adverse impact of droughts on economic growth can be larger than other hazards. In Europe, the severe drought is affecting the farming sector, inland shipping, and energy generation.
In the long term, the economic impact of climate physical risks will largely depend on adaptation efforts and the path of climate change and weather patterns.
"With climate hazards adding up and droughts becoming more frequent and costly, assessing the various economic effects, is crucial. Climate adaptation and preparedness will have to keep up with the intensity and frequency of climate hazards", said Adriana Alvarado, Senior Vice President in the Global Sovereign Ratings Group. "In terms of the credit implications, for governments at various levels, we assess whether climate change and adverse weather events could potentially destroy a material portion of national wealth, weaken the financial system, or disrupt the economy".
Morningstar DBRS Summer of 2026: Heatwaves, Wildfires and Droughts
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