Does low vulnerability and high readiness in climate change reduce sovereign risk as well as improve credit rating?

Abstract

This paper delves into the consequences of climate change on the stability of nations, assessing this impact across 42 countries worldwide by employing 10-year bond prices and their respective credit ratings as primary indicators. Climate change has long been acknowledged as a pivotal driver of a country's economic prospects. However, given governments' historical prioritization of economic concerns over environmental ones, climate change has continued to worsen over time, making it an issue of utmost urgency today. Consequently, it is no longer feasible to disregard this pressing problem. To gain a more comprehensive understanding of how climate change affects different regions, the study categorizes countries into smaller, characteristic groups. The research utilizes annual data spanning from 2004 to 2022 and employs fixed effects panel analysis alongside vulnerability and readiness indices tailored to climate change. Additionally, the study conducts panel structural VAR analysis to ascertain the causal relationships and impact ordering among the various variables under investigation