Climate Change Puts Sovereigns at Downgrade Risk
A global failure to curb carbon emissions will lead to rising debt-servicing costs for 59 nations within the next decade. According to a study published in the Management Science journal on Monday found, that simulated the economic impact of climate change on current sovereign credit ratings.
The UEA/Cambridge study trained artificial intelligence models on S&P Global’s existing ratings and then combined that with climate economic models and S&P’s own natural disaster risk assessments to create new ratings for various climate scenarios.
A downgrade to 59 sovereigns emerged from a so-called RCP 8.5 scenario of emissions that keep rising. By comparison, 48 sovereigns experienced downgrades between January 2020 and February 2021 during the turmoil of the COVID-19 pandemic.
“Our results support the idea that deferring green investments will increase costs of borrowing for nations, which will translate into higher costs of corporate debt,” researcher Patrycja Klusak said of the study led by the University of East Anglia (UEA) and the University of Cambridge.
Sovereigns at downgrade risk is related to green investment. Although rising debt costs would be just one extra facet of the overall economic damage which climate change is already causing.
If the planet manages to stick to the goal of the Paris Climate Agreement, with temperatures held under a two-degree rise, sovereign credit ratings would under the simulation see no impact in the short-term and only limited long-term effects.
A worst-case scenario of high emissions through to the end of the century would on the other hand result in higher global debt-servicing costs, rising up to the hundreds of billions of dollars in current money, the model found.
While developing nations with lower credit scores are seen hit hardest by the physical effects of climate change, nations with the highest ranking credit scores were likely to face more severe downgrades simply because they have furthest to fall.
“There are no winners,” Klusak said in an interview.