Why Climate Risk Hikes Supply Chain Finance Costs Worldwide

Physical climate risks are fast becoming a key influence on corporate balance sheets. The threat posed by storms, floods and extreme heat now feeds directly into the cost of capital for companies worldwide.

Bloomberg research reveals that the more climate-exposed a company is, the more it pays to access funding -- regardless of its size, location or industry.

These higher costs are especially sharp in emerging markets and heavy industries, where exposure to extreme weather events is high and resilience measures remain uneven. While insurance markets have long priced in the threat of hurricanes and wildfires, this premium is now spreading beyond the realm of insurance into the wider world of corporate finance.

“In other words: if you’re more exposed to storms, floods, or heatwaves, financing gets more expensive – and valuations take a hit,” says Niall Smith, Senior Sustainable Investments Quantitative Researcher at Bloomberg.

Climate risk quietly reshapes financial markets

The finance sector is built around pricing risk. Banks, brokers and investors make their margin from lending to companies with risk on their books -- climate-related or otherwise.

However, with physical climate threats growing more frequent and more severe, Bloomberg’s latest study finds that environmental risk is now embedded in the cost of capital itself.

Using data from publicly listed companies, Bloomberg links physical climate exposure with financing costs by running regression analysis. This approach allows researchers to isolate the cost of capital that can be attributed directly to climate risk, controlling for variables like industry, geography and company size.

Initial analysis of raw data shows no clear pattern, leading the researchers to state: “Initially, descriptive analysis of the raw firm-level data is unconvincing in supporting the hypothesis.”

However, once the data is adjusted for structural factors, the relationship becomes clear. Companies facing a 10% increase in asset damage from climate hazards face a 22 basis point rise in their average cost of capital. That effect is statistically significant, with a p-value under 0.001—an indicator of the likelihood that the finding is not down to chance.

The study also uses physical risk indicators developed with Riskthinking.AI. These tools track exposure to ten major hazards, including tropical cyclones, coastal and riverine flooding and heat stress.

Heavy industries carry the biggest burden

The cost of climate exposure does not fall evenly across the board.

Asset-heavy sectors such as materials, utilities and communications face much steeper increases in financing costs. Materials firms pay an extra 56 basis points for each 10-point rise in physical climate risk, while utilities face a 45 basis point increase. Communications companies show a 62 basis point effect, though Bloomberg cautions that this part of the data is less robust.

“This finding is quite theoretically consistent, suggesting that capital markets are attuned to the fact that asset-intensive sectors with typically higher PPE (Property, Plant & Equipment) values are more exposed to the physical impacts of climate change,” the analysis states.

By contrast, sectors with fewer physical assets or lower exposure to environmental hazards experience smaller increases in their capital costs.

The data shows that markets now differentiate sharply between industries based on climate exposure, creating a clear incentive for businesses in high-risk sectors to disclose and manage their climate risks more carefully.

Geography matters 

The study finds that the financial impact of climate risk also varies sharply by region. Latin American companies face the steepest premiums, with an extra 94 basis points added to their cost of capital for the same level of climate risk. Asian companies pay 25 basis points more, while developed markets show a much smaller effect.

Bloomberg adjusts for differences in sector mix, which means the regional gap likely reflects real pricing of geographic risk rather than just industry structure. Brazil is one standout example—high climate exposure there lines up with some of the highest observed financing costs.

Still, the study notes the complexity of linking country-level exposure to company-specific cost impacts: “Together these results imply that markets may be pricing physical risk into financing costs, but that they’re not simply applying a straightforward ‘country risk premium’ to firm-level WACC.”

WACC stands for Weighted Average Cost of Capital, a measure used to determine how much it costs a company to raise money through equity and debt.

With COP30 on the horizon, pressure grows for international coordination on climate finance.

As Barbara Buchner, Global Managing Director at the Climate Policy Initiative for the UN, explains: “Success looks like getting people in the room who aren’t there yet and making sure everyone, from local to global levels, works together to scale private investment.”

Investors and corporates adjust their strategies

For investors, the research offers a wake-up call. The data shows that ignoring physical risk can distort valuations and create unexpected drag on returns.

Bloomberg advises: “Investors should look to fully integrate physical risk factors into valuations, discounted cash flow models, asset allocations and wider investment processes to maintain risk-adjusted returns as markets increasingly wake up to the realities of climate change.”

For companies, the implications are more immediate. Those that invest in climate resilience may find a direct benefit in their cost of borrowing.

According to the report: “Corporates on the other hand should note that by demonstrating resilience to physical risk – through disclosure of climate risk assessments and clear adaptation plans – they may be able to lower their financing costs moving forward.”