Tuesday, October 26

United Kingdom, United States and other countries face a drop in credit ratings due to CO2 emissions Rating agencies

Sovereign debt relief is expected for Britain, the United States and many other countries around the world, unless they urgently redouble their efforts to reduce greenhouse gas emissions. according to a study.

In the first attempt to adjust credit ratings to account for the economic consequences of the climate emergency, a team of academics led by the University of Cambridge said the lack of action would leave governments paying billions of dollars more to ask borrowed.

The study used artificial intelligence to simulate the economic effects of climate change on Standard and Poor’s ratings of 108 countries over the next 10, 30 and 50 years, and by the end of the century.

It found that climate change had the potential to have a greater impact on credit ratings than the Covid-19 pandemic. If nothing were done to curb the recent trend in greenhouse gas emissions, 63 nations would see a downgrade in 2030, compared to 48 targeted by rating agencies since early 2020.

Sovereign ratings assess the the solvency of nations and they are a key indicator for investors as they assess the risk of more than $ 66 trillion (£ 48 trillion) in government debt. There are 20 degrees or notches that start with the most precious AAA. Any bond with a rating lower than 10 is considered junk.

Among the major developed countries, the study found that the UK was at risk of being downgraded by one notch from its current AA rating by 2030, and the US by two notches from AA +. Germany and Sweden would suffer a three-tier AAA downgrade. The researchers said that the reason the countries with the highest scores received the greatest impact was that they had to keep falling.

More downgrades would follow in the coming decades as the impact of global warming on growth and productivity became more severe, they said.

In the absence of serious action to curb emissions, 80 countries would face an average cut of 2.48 notches by the end of the century. The UK would be downgraded by 3.5 notches, while the two largest emerging market countries, China and India, would have their debt classified as junk after downgrades of eight and five notches, respectively.

The study said that for the G7 nations (UK, US, Germany, Japan, Canada, France and Italy) plus China, additional interest payments on sovereign debt caused by downgrades induced by weather alone could cost Treasuries between $ 137 billion and $ 205 billion.

Pati Klusak, Norwich Business School and lead author of the report, said: “The 2008 financial crisis showed what happens when rating agencies get it wrong. The climate presents far greater risks and we simply cannot afford to be wrong again.

“Existing climate risk disclosures are often voluntary, unregulated, and disconnected from the latest science. But they don’t have to be. We demonstrate that well-known financial indicators, such as sovereign ratings, can be adjusted to provide scientific information on climate risk for investors.

Regulators such as the US Securities and Exchange Commission and ESMA [European Securities Markets Authority] it should demand that rating agencies begin to reflect these short-term risks of climate change. “


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