Saturday, May 18, 2024

Climate change will affect sovereign creditworthiness

For the first time ever, a credit ratings agency has forecast the impact that climate change could have on nations’ creditworthiness.

The overview from Standard & Poor’s (S&P) is that climate change is likely to be one of the global mega-trends impacting sovereign creditworthiness – in most cases negatively; that the impact on creditworthiness will probably be felt through various channels, including economic growth, external performance, and public finances; and, that sovereigns will probably be unevenly affected by climate change, with poorer and lower rated sovereigns typically hit hardest. The agency attributes the latter to reliance on agricultural production and employment, which can be vulnerable to shifting climate patterns and extreme weather events as well as to weaker capacity to absorb the financial cost.

“We believe that alongside aging, climate change, and specifically global warming, is going to be the second global mega-trend affecting sovereign credit risk. We also believe that it will put downward pressure on sovereign ratings during the remainder of this century,” says the New York-based agency.
In its first-ever report, it gives Botswana an AA, the highest rating for any African country and the 32nd highest among the 116 nations sampled. However, part of what comes with this trailblazing effort is the realisation on S&P’s part that, “our understanding of climate change … is still developing and we lack sufficient reliable data to make precise predictions on if and when the effects of a warming planet and changing weather patterns will overshadow other factors”. It says that by its very nature of complex and inter-connected ecological systems, weather is inherently unpredictable.

Firstly, there remains significant uncertainty about how climate change will impact individual national territories and economies. While the 2013 report of the Intergovernmental Panel on Climate Change (IPCC) estimates that the average winter temperature in Northern Europe could rise between +2┬░C to +7┬░C by 2100, “there is also a chance that the warming in winter will remain within the bounds of a standard deviation of present-day natural variability”. Secondly, the degree to which individual countries and societies are going to be affected by warming and changing weather patterns depends largely on actions undertaken by other, often far-away societies.

“A society may choose to reduce its carbon emissions unilaterally to reduce the risk of the potential consequences of global warming, but due to the global character most of the benefits of that society’s sacrifice will accrue to other nations,” S&P says.

The agency quotes Munich Re, one of the world’s largest reinsurers that has been studying climate change since 1973. The latter’s research suggests that weather-related loss-events have risen in all continents, most significantly in Asia and North America, where they increased more than fourfold. In Eastern Asia overall losses (insured and non-insured) used to be below $10 billion per year, but have regularly surpassed $20 billion during the last decade with a peak of over $50 billion.

Despite the devastation caused by extreme weather events, S&P has not revised the rating of a sovereign as a consequence. Its explanation is that, while large in absolute terms, the size of the devastation has so far not been sufficient to impact the rating overall.

“However, assuming that extreme weather events are on the rise in terms of frequency and destruction, how this trend could feed through to our ratings on sovereign states bears consideration,” the agency says.

Africa’s ecological footprintÔÇöthe area needed to generate the resources consumed by a given group or activity ÔÇô has been growing steadily. Its total ecological footprint is set to double by 2040.


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