First Climate-adjusted Sovereign Credit Rating

GS Paper III Environment and Ecology

Context:

A new research claimed to be the first climate-adjusted sovereign credit rating has found links between the creditworthiness of countries and the impact of climate change.

More about the news:

A team of economists at UEA and Cambridge used artificial intelligence (AI) to simulate the economic effects of climate change on Standard and Poor’s (S&P) ratings for 108 countries over the next 10, 30 and 50 years and by the end of the century.

Key Highlights from the Research:

If emissions aren’t reduced, around 59 countries might experience a decline in their sovereign credit ratings, including India.
Over the next decade, there could be a rise in global corporate debt.
According to research from the University of East Anglia and the University of Cambridge, countries like Chile, Indonesia, China, and India could see a two-notch drop, while the United States, Canada, and the United Kingdom could also experience a two-notch or one-notch reduction.
The results showed that many national economies can expect downgrades unless action is taken to reduce emissions.
The study suggested adherence to the Paris Climate Agreement, with temperatures held under a two-degree rise, would have no short-term impact on sovereign credit ratings and keep the long-term effects to a minimum.

Significance: The research contributes to bridging the gap between climate science and real-world financial indicators.

Sovereign Credit Rating:

Sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity.
Significance: It can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
- At the request of the country, a credit rating agency will evaluate its economic and political environment to assign it a rating.
Various entities involved in credit rating in India include CRISIL, ICRA, Fitch Ratings, etc.