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Sovereign ratings change under climate risks

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  • Sun, Xiaolei
  • Shen, Yiran
  • Guo, Kun
  • Ji, Qiang

Abstract

Do climate risks affect sovereign ratings? This study selects 117 countries around the globe and constructs the ordered logit model to study the relationship between climate risks and sovereign ratings quantitatively. It also determines the importance of climate risk factors compared with traditional sovereign rating determinants through a random forest model. The empirical results show that climate vulnerability and readiness have become new determinants that have received some attention in the sovereign rating system, and after controlling for traditional sovereign rating determinants including macroeconomic, political, and external factors, climate vulnerability has a significant negative effect on sovereign ratings, and climate readiness has a significant positive effect on sovereign ratings. The heterogeneity results suggest that the impacts of climate risks are stronger for developing and high-damaged countries and that greater gains can be achieved by increasing climate readiness for these countries. This study provides new evidence to quantify the impacts of climate risks on sovereign ratings and provides decision support for countries to cope with the adverse impacts of climate change.

Suggested Citation

  • Sun, Xiaolei & Shen, Yiran & Guo, Kun & Ji, Qiang, 2023. "Sovereign ratings change under climate risks," Research in International Business and Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:riibaf:v:66:y:2023:i:c:s0275531923001666
    DOI: 10.1016/j.ribaf.2023.102040
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    References listed on IDEAS

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    1. Melissa Dell & Benjamin F. Jones & Benjamin A. Olken, 2012. "Temperature Shocks and Economic Growth: Evidence from the Last Half Century," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 66-95, July.
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    Cited by:

    1. Sun, Yanpeng & Song, Yuru & Long, Chi & Qin, Meng & Lobonţ, Oana-Ramona, 2023. "How to improve global environmental governance? Lessons learned from climate risk and climate policy uncertainty," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1666-1676.
    2. Guo, Kun & Luan, Liyuan & Cai, Xiaoli & Zhang, Dayong & Ji, Qiang, 2024. "Energy trade stability of China: Policy options with increasing climate risks," Energy Policy, Elsevier, vol. 184(C).
    3. Zhizhen Chen & Guifen Shi & Boyang Sun, 2024. "Cross-border spillovers in G20 sovereign CDS markets: cluster analysis based on K-means machine learning algorithm and TVP–VAR models," Empirical Economics, Springer, vol. 67(6), pages 2463-2502, December.
    4. Ma, Dandan & Zhang, Yunhan & Ji, Qiang & Zhao, Wan-Li & Zhai, Pengxiang, 2024. "Heterogeneous impacts of climate change news on China's financial markets," International Review of Financial Analysis, Elsevier, vol. 91(C).
    5. Liu, Peng & Chen, Yaru & Mu, Yan, 2024. "The impact of climate risk aversion on agribusiness share price volatility," Finance Research Letters, Elsevier, vol. 61(C).

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