Sovereign Debt in a Warming World: Are Credit Ratings Responding to Climate Risks?

Abstract

Investors and policymakers increasingly worry that climate change threatens sovereign debt. While recent studies find a negative effect, they typically estimate models assuming a time-invariant impact and rely on climate variables endogenous to economic and policy conditions. This paper addresses both concerns by employing a long-horizon, nonactionable, external measure of climate risk from the Notre Dame Global Adaptation Initiative, interacted with year-fixed effects to capture any time-varying impacts. Analyzing sovereign issuer default ratings from major agencies, I find no evidence that climate risk systematically affects ratings or that its influence has evolved over time. I confirm these results using climate disaster data from the Emergency Events Database. These findings likely reflect credit rating agencies' short- to medium-term focus on economic fundamentals rather than on long-term climate risks.