S&P: climate change is a ‘megatrend’ set to impact national creditworthiness

Climate change, along with an ageing global population, is a “megatrend” that will impact on sovereign creditworthiness, according to a report from ratings agency Standard & Poor’s.

The report – Climate Change is a Global Mega-Trend for Sovereign Risk – states that the effects of climate change on creditworthiness will be felt through various channels, including economic growth, external performance and public finances, and in most cases will be negative.

The effects of climate change on creditworthiness will be unevenly distributed, as it has been demonstrated in other areas concerning climate change. Countries that are poorer and lower rated will typically be hit hardest, contributing to the already increasing inequality seen globally.

The report ranks the vulnerability of 116 economies based on three factors – the share of the population living in coastal areas below five meters of altitude, share of agriculture in national GDP and the vulnerability index complied by Notre Dame University Global Adaptation Index.

Vietnam, Bangladesh and Senegal were identified as the most vulnerable nations, whilst Luxembourg, Switzerland and Austria were found to be the least at risk. The UK was raked 12, where 1 signals the least risk.

The report said, “We believe that alongside ageing, climate change, and specially global warming, is going to be the second global megatrend affecting sovereign credit risk. We also believe that it will put downward pressure on sovereign ratings during the remainder of the century.”

It added that climate change is an even more “challenging problem to grasp” than the world’s shifting demographic because of three differences – the complex science; a global, collective action problem; and the effects falling disproportionately on poorer countries.

One of the main issues identified is that whilst a country suffering from the effects of climate change can take action a global effort is needed.

“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 faraway societies,” the report explains.

“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 in other nations.”

Extreme weather was highlighted as one of the main factors affecting sovereign ratings. Data shows that weather related losses have risen in all continents since the 1980s, with Asia and North America seeing costs increase more than fourfold. As the frequency and destruction of extreme weather events continues to rise, this is likely to create a range of other issues in areas such as agriculture, sanitation and infrastructure.

Previous research found that more than 60 countries with a total estimated output of $44 trillion are at high risk of extreme climate events by 2025. As a result, 31% of global economic output will be placed at risk.

Photo: marnanel via Flickr

Further reading:

Climate change increasing flood risk in the UK

Climate change threatens 31% of global economic output

Leaked IPCC report warns of social and economic impact of climate change

Building a sustainable global economy

UK needs to adapt to climate change risks