Feeling the Heat: Climate Shocks and Credit Ratings

Climate change is an existential threat to the world economy like no other, with complex, evolving and nonlinear dynamics that remain a source of great uncertainty. There is a bourgeoning literature on the economic impact of climate change, but research on how climate change affects sovereign risks is limited. Building on our previous research focusing on the impact of climate change on sovereign risks, this paper empirically investigates how climate change may affect sovereign credit ratings. By means of binary-choice models, we find that climate change vulnerability has adverse effects on sovereign credit ratings, after controlling for conventional macroeconomic determinants of credit worthiness. On the other hand, with regards to climate change resilience, we find that countries with greater climate change resilience benefit from higher (better) credit ratings. These findings, robust to a battery of sensitivity checks, also show that impact of climate change is disproportionately greater in developing countries due largely to weaker capacity to adapt to and mitigate the consequences of climate change.