| Summary: | Enthusiasm for ‘greening the financial system’ is welcome, but a fundamental challenge
remains: financial decision makers lack the necessary information. It is not enough to know
that climate change is bad. Markets need credible, digestible information on how climate
change translates into material risks. To bridge the gap between climate science and real-world
financial indicators, we simulate the effect of climate change on sovereign credit ratings for
109 countries, creating the world’s first climate-adjusted sovereign credit rating. Under various
warming scenarios, we find evidence of climate-induced sovereign downgrades as early as
2030, increasing in intensity and across more countries over the century. We find strong
evidence that stringent climate policy consistent with limiting warming to below 2°C,
honouring the Paris Climate Agreement, and following RCP 2.6 could nearly eliminate the
effect of climate change on ratings. In contrast, under higher emissions scenarios (i.e., RCP
8.5), 59 sovereigns experience climate-induced downgrades by 2030, with an average
reduction of 0.68 notches, rising to 81 sovereigns facing an average downgrade of 2.18 notches
by 2100. We calculate the effect of climate-induced sovereign downgrades on the cost of
corporate and sovereign debt. Across the sample, climate change could increase the annual
interest payments on sovereign debt by US$ 45-67 billion under RCP 2.6, rising to US$ 135-
203 billion under RCP 8.5. The additional cost to corporates is US$ 10-17 billion under RCP
2.6, and US$ 35-61 billion under RCP 8.5.
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