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.

News Source: DTE