Climate change to hit sovereign ratings

Sovereign ratings will be adversely affected by climate change and the uncertainties will make it challenging to quantify the impact, Fitch Ratings believes.

Fitch Rating’s white paper ‘Climate change impact on sovereign ratings: A Primer” said climate change would become a more important driver of rating changes as the effects became clearer, closer and more material.

It said a comprehensive assessment of future risks would require further information, analysis or assumptions on issues including:

• Future international policy actions on greenhouse gas (GHG) emissions and the effect of the resulting atmospheric stock of GHGs on global temperatures;
• The sovereign exposure to country-specific rises in temperature, drought, sea levels, extreme weather and natural disasters;
• The constraints on exploitation of fossil fuels; and
• The likely effectiveness of mitigation and adaption strategies.

Assessments would also be needed on the impact of climate and policy developments on variables that would directly affect sovereign creditworthiness such as GDP, public finances and political risk; as well as judgments on relevant time and rating horizons.

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“Countries will have varying capacities to adapt to and mitigate physical risks or diversifying economies to limit transition risks through policy changes and deploying resources and know-how,” Fitch said.

“Other risks include domestic political stability, international trade relations, heightened conflict and deep changes to institutions or economic policies. There may well be 'unknown unknowns'.”