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A worldwide shortfall in curbing carbon emissions could result in increased debt-servicing costs for 59 countries over the forthcoming decade, as per a study simulating the economic repercussions of climate change on current sovereign credit ratings.
Among the affected, China, India, the USA, and Canada might see elevated costs due to a two-notch dip in their credit scores under a “climate-adjusted” ratings approach. This was the conclusion of the study unveiled in the Management Science journal on Monday.
“Our findings back the notion that delaying green investments will heighten nations’ borrowing expenses, leading to an uptick in corporate debt costs,” commented researcher Patrycja Klusak regarding the research spearheaded by the University of East Anglia (UEA) and the University of Cambridge.
The surge in debt expenses is just another dimension of the overarching economic detriment already being induced by climate change. Allianz approximates that recent heatwaves might have already detracted 0.6% points from global production this year.
Whilst rating agencies recognise the susceptibility of economies to climatic changes, they’ve remained reticent in quantifying these risks within their rating processes due to the ambiguity surrounding the probable magnitude of the impact.
The study by UEA and Cambridge employed artificial intelligence techniques on S&P Global’s extant ratings. They then merged these with climate economic methodologies and S&P’s own natural disaster risk evaluations to craft novel ratings for diverse climate situations.
From the RCP 8.5 scenario, which posits continuous emission escalation, a downgrade for 59 sovereigns surfaced. For context, 48 sovereigns underwent downgrades between January 2020 and February 2021 amidst the COVID-19 pandemic upheaval.
Should the world adhere to the Paris Climate Agreement’s objectives, maintaining temperature increases below two degrees, sovereign credit ratings in the simulation would face negligible immediate repercussions and minimal long-term effects.
Conversely, a bleak scenario with sustained high emissions till the century’s close would culminate in escalating global debt-servicing fees, amounting to hundreds of billions in today’s currency, according to the model.
While emerging nations with modest credit ratings are predicted to be most adversely affected by the tangible consequences of climate change, countries with top-tier credit scores might experience sharper downgrades as they possess the most room for decline.
“There are no victors,” Klusak remarked during a discussion.
These insights emerge as international regulators strive to fathom the potential economic and global financial fallout due to climate change. A document from the European Central Bank the previous year advocated for enhanced transparency in incorporating these risks into credit ratings.
S&P Global Ratings unveiled its environmental, social, and governance (ESG) principles pertinent to its credit ratings, encompassing references to the economic harm from climate change and related mitigation expenses. However, it refrained from commenting on the UEA/Cambridge research.
In contrast, Fitch Ratings highlighted its “ESG Relevance Scores” system, which integrates elements like environmental impact exposure in its evaluations.
“These have been persistent and progressively crucial rating elements that we consistently consider in our evaluations and consistently release research and commentary on,” the firm mentioned when approached for a comment.