Climate change had the potential to have a bigger impact on credit ratings than the Covid-19 pandemic

Larry Elliott writes on The Guardian website about a new study that used artificial intelligence to simulate the economic effects of climate change on Standard and Poor’s ratings for 108 countries over the next ten, 30 and 50 years, and by the end of the century.

 

UK, US and others face credit rating fall over CO2 emissions – study

Sovereign debt downgrades are in prospect for Britain, the US and scores of other countries around the world unless they urgently step up their efforts to reduce greenhouse gas emissions, according to a study.

In the first attempt to adjust credit ratings to take account of the economic consequences of the climate emergency, a team of academics led by Cambridge University said failure to act would leave governments paying billions of dollars more to borrow.

The study used artificial intelligence to simulate the economic effects of climate change on Standard and Poor’s ratings for 108 countries over the next ten, 30 and 50 years, and by the end of the century.

It found that climate change had the potential to have a bigger impact on credit ratings than the Covid-19 pandemic. If nothing was done to slow the recent trend in greenhouse gas emissions, 63 nations would suffer a downgrade by 2030, compared with the 48 targeted by the ratings agencies since the start of 2020.

Sovereign ratings assess the nations’ creditworthiness and are a key gauge for investors as they weigh up the riskiness of more than $66tn (£48tn) in government debt. There are 20 grades or notches starting with the most prized AAA. Any bond rated below 10 is considered junk.

Among the leading developed countries, the study found that the UK risked being downgraded by one notch from its current rating of AA by 2030, and the US by two notches from AA+. Germany and Sweden would suffer a three-notch downgrade from AAA. Researchers said the reason the countries with the highest ratings took the biggest hit was that they had further to fall.

Further downgrades would follow over the coming decades as the impact of global heating on growth and productivity became more severe, they said.

In the absence of serious action to curb emissions, 80 countries would face an average downgrade of 2.48 notches by the end of the century. The UK would be downgraded by 3.5 notches while the two biggest emerging market countries – China and India – would have their debt classified as junk after downgrades of eight and five notches respectively.

The study said that for the G7 nations – the UK, the US, Germany, Japan, Canada, France and Italy – plus China, the additional interest payments on sovereign debt caused by the climate-induced downgrades alone could cost treasuries between $137bn and $205bn.

Pati Klusak of the Norwich Business School and the report’s lead author said: “The 2008 financial crisis showed what happens when ratings agencies get it wrong. Climate presents much bigger risks and we simply can’t afford to get it wrong again.

“Existing climate risk disclosures are typically voluntary, unregulated and disconnected from the latest science. But they don’t have to be. We show that well-known financial indicators such as sovereign ratings can be adjusted to provide science-based climate risk information for investors.

“Regulators like the US Securities and Exchange Commission and ESMA [European Securities Markets Authority] should demand that ratings agencies begin to reflect these near-term risks from climate change.”

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