Climate Smart Credit Ratings Would Cause Many Countries to be Downgraded by 2030

Graphic: Bennett Institute for Public Policy, Cambridge University

A group of economists from Cambridge University using artificial intelligence to simulate the economic effects of climate change on the credit ratings of 108 countries over the coming decades, found that unless we reign in carbon emissions, 63 nations could have their credit downgraded by over a notch by 2030.  Of those, the U.S. declines by two notches, while Germany, India, Sweden, and the Netherlands drop three notches. “The majority of countries in our sample will suffer downgrades by 2030 if the current trajectory of carbon emissions is maintained. Virtually all countries, whether rich or poor, hot or cold, will be downgraded by 2100,” said Dr. Kamiar Mohaddes, one of the authors.

Why This Matters:  This is why global climate action matters to all countries — even rich ones will have a hard time servicing their debts from the rising climate costs.  For nations, the cost of borrowing money on the world market is impacted by their credit rating — “the ratings – and agencies behind them – act as gatekeepers to global capital.” But according to one of the authors, climate change is hardly factored in today.  “The ESG ratings market is expected to top a billion dollars this year, yet it desperately lacks climate science underpinnings,” said Dr. Matthew Agarwala, co-author from Cambridge’s Bennett Institute for Public Policy. 

By 2100, Huge Drops

The study found that 80 countries will have an average downgrade of 2.48 notches by 2100, according to the researchers. The hardest-hit countries by 2100 include China, Chile, Malaysia, and Mexico which are projected to see downgrades of up to six notches by the end of the 21st century, with the U.S., Germany, Canada, India, Peru, and Australia, projected to see lose approximately four notches.  What is the global cost of all those downgrades, you ask?  According to the authors, they would increase the cost of borrowing significantly — the downgraded nations would experience debt service payment increases of $137 billion to $205 billion by the end of the century.

The Bottom Line

According to the lead author, “Markets need credible, digestible information on how climate change translates into material risk. By connecting the core climate science with indicators that are already hard-wired into the financial system, we show that climate risk can be assessed without compromising scientific credibility, economic validity, or decision-readiness.”  Worse yet, these estimates are “extremely conservative” because the authors only took into consideration a straight temperature rise. However, if when they added in climate volatility over time – extreme weather events like those we see today – “the downgrades and related costs increase substantially.”

To Go Deeper: Check out this blog entitled “Rising Temperatures, Melting Ratings” by the authors of the study.

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