Climate Change and Sovereign Risk

This report provides a comprehensive analysis of the ways in which climate risks affect sovereign risk. New empirical evidence demonstrates how climate risk and resilience influence the cost of sovereign borrowing, with econometric analysis showing that higher climate risk vulnerability leads to significant rises in sovereign bond yields. The report provides a closer look at Southeast Asia, a region with significant exposure to climate hazards such as storms, floods, sea level rise, heat waves, and water stress. It highlights that the implications of climate change for macrofinancial stability and sovereign risk are likely to be material for most if not all countries in Southeast Asia.

Climate Change and Sovereign Risk also stresses the need for governments to climate-proof their economies and public finances or potentially face an ever-worsening spiral of climate vulnerability and unsustainable debt burdens. It outlines five policy recommendations, emphasizing the importance for financial authorities to ingrate climate risk into their risk management processes and for governments to prioritize comprehensive climate vulnerability assessments and work with the financial sector to promote investment in climate adaptation.

Co-published with SOAS University of London, World Wide Fund for Nature Singapore, and Four Twenty Seven.