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Feeling the Heat: Climate Shocks and Credit Ratings

Author

Listed:
  • Serhan Cevik
  • João Tovar Jalles

    (University of Lisbon-Lisbon School of Economics and Management (ISEG), Portugal)

Abstract

Climate change is an existential threat to the world economy like no other, with complex, evolving and nonlinear dynamics that remain a source of great uncertainty. There is a bourgeoning literature on the economic impact of climate change, but research on how climate change affects sovereign credit ratings is limited. Building on our previous research focusing on the impact of climate change on sovereign risks, this paper empirically investigates how climate change may affect sovereign credit ratings. By means of binary-choice models, we find that climate change vulnerability has adverse effects on sovereign credit ratings, after controlling for conventional macroeconomic determinants of credit worthiness. On the other hand, with regards to climate change resilience, we find that countries with greater climate change resilience benefit from better credit ratings. These findings, robust to a battery of sensitivity checks, also show that impact of climate change is disporportinately greater in developing countries.

Suggested Citation

  • Serhan Cevik & João Tovar Jalles, 2023. "Feeling the Heat: Climate Shocks and Credit Ratings," Review of Development Finance Journal, Chartered Institute of Development Finance, vol. 13(2), pages 21-34.
    • Handle: RePEc:afj:journ3:v:13:y:2023:i:2:p:21-34
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    File URL: https://journals.co.za/doi/abs/10.10520/ejc-rdfin_v13_n2_a2
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    Citations

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    Cited by:

    1. Patrycja Klusak & Matthew Agarwala & Matt Burke & Moritz Kraemer & Kamiar Mohaddes, 2023. "Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness," Management Science, INFORMS, vol. 69(12), pages 7468-7491, December.
    2. Fabrizio Ferriani & Andrea Gazzani & Filippo Natoli, 2023. "Flight to climatic safety: local natural disasters and global portfolio flows," Temi di discussione (Economic working papers) 1420, Bank of Italy, Economic Research and International Relations Area.
    3. Serhan Cevik & Fedor Miryugin, 2023. "Rogue Waves: Climate Change and Firm Performance," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 65(1), pages 29-59, March.
    4. Agarwala, Matthew & Burke, Matt & Klusak, Patrycja & Mohaddes, Kamiar & Volz, Ulrich & Zenghelis, Dimitri, 2021. "Climate Change And Fiscal Sustainability: Risks And Opportunities," National Institute Economic Review, National Institute of Economic and Social Research, vol. 258, pages 28-46, November.
    5. Oliver Takawira & John W. Muteba Mwamba, 2022. "Sovereign Credit Ratings Analysis Using the Logistic Regression Model," Risks, MDPI, vol. 10(4), pages 1-24, March.
    6. Karydas, Christos & Xepapadeas, Anastasios, 2022. "Climate change financial risks: Implications for asset pricing and interest rates," Journal of Financial Stability, Elsevier, vol. 63(C).
    7. Serhan Cevik, João Tovar Jalles, 2023. "Eye of the Storm: The Impact of Climate Shocks on Inflation and Growth," Working Papers REM 2023/0276, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    8. Serhan Cevik, João Tovar Jalles, 2023. "Restructuring Reforms for Green Growth," Working Papers REM 2023/0278, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    9. Committeri, Marco & Brüggemann, Axel & Kosterink, Patrick & Reininger, Thomas & Stevens, Luc & Vonessen, Benjamin & Zaghini, Andrea & Garrido, Isabel & Van Meensel, Lena & Strašuna, Lija & Tiililä, Ne, 2022. "The role of the IMF in addressing climate change risks," Occasional Paper Series 309, European Central Bank.
    10. Olivia Serdeczny & Marina Andrijevic & Claire Fyson & Tabea Lissner & Inga Menke & Carl-Friedrich Schleussner & Emily Theokritoff & Adelle Thomas, 2024. "Climatic risks to adaptive capacity," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 29(1), pages 1-16, January.
    11. Cevik, Serhan & Jalles, João Tovar, 2023. "For whom the bell tolls: Climate change and income inequality," Energy Policy, Elsevier, vol. 174(C).
    12. Matthew Agarwala & Matt Burke & Patrycja Klusak & Kamiar Mohaddes & Ulrich Volz & Dimitri Zenghelis, 2021. "Climate Change and Fiscal Responsibility: Risks and Opportunities," Working Papers 008, The Productivity Institute.
    13. Corina MURAFA & Theodor COJOIANU, 2023. "Financial Instruments for Decarbonization: Likely Pathways in the Romanian Economy," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 24(2), pages 198-209, May.
    14. Mr. Serhan Cevik & João Tovar Jalles, 2023. "Eye of the Storm: The Impact of Climate Shocks on Inflation and Growth," IMF Working Papers 2023/087, International Monetary Fund.

    More about this item

    Keywords

    Climate change; vulnerability; resilience; credit ratings;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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