How Climate Resilience Shapes Sovereign Credit Risk: A Cross-Country Comparative Study

Abstract

This article aims to identify the impact of a country’s climate risk resilience on its sovereign credit rating, and to answer whether a country’s vulnerability can be mitigated by its readiness. The analysis also examines the robustness of the identified relationships, assessing their relevance to both investment-grade and speculative-grade countries. The study is based on a cross-country sample of 67 countries. It examines the relationship between sovereign credit ratings issued by Standard & Poor’s and Moody’s and the ND-GAIN climate risk index, including the effects of its vulnerability and readiness components. To examine the link between sovereign credit ratings and climate resilience, we employ a cluster analysis based on climate vulnerability, adaptive capacity, and sovereign credit ratings, complemented by a linear regression model. The results indicate a positive relationship between climate resilience and sovereign credit rating. Vulnerability to climate risk negatively affects the rating, whereas the positive impact of climate readiness is more pronounced in countries with higher credit ratings than in those with lower ratings. The conclusions offer new insights into the determinants of sovereign credit ratings and the impact of climate risk on a country’s credibility, providing important implications for climate policy and for the methodologies used by credit rating agencies to assess sovereign ratings.