Sovereign ratings change under climate risks

Do climate risks affect sovereign ratings? This study selects 117 countries around the globe and constructs the ordered logit model to study the relationship between climate risks and sovereign ratings quantitatively. It also determines the importance of climate risk factors compared with traditional sovereign rating determinants through a random forest model. The empirical results show that climate vulnerability and readiness have become new determinants that have received some attention in the sovereign rating system, and after controlling for traditional sovereign rating determinants including macroeconomic, political, and external factors, climate vulnerability has a significant negative effect on sovereign ratings, and climate readiness has a significant positive effect on sovereign ratings. The heterogeneity results suggest that the impacts of climate risks are stronger for developing and high-damaged countries and that greater gains can be achieved by increasing climate readiness for these countries. This study provides new evidence to quantify the impacts of climate risks on sovereign ratings and provides decision support for countries to cope with the adverse impacts of climate change.