Climate Change May Affect India & 58 Other Nations’ Credit Ratings: Here’s why

by | Aug 12, 2023 | Daily News, Environmental News

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The looming shadow of Climate change may affect India & 58 other nations’ credit ratings. Recent research findings indicate that countries with higher sovereign ratings could face more pronounced downgrades if climate-related challenges remain unaddressed. This revelation could pave the way for an unsettling rise in global corporate debt within the coming decade.

Research Suggests Alarming Trends

Climate Change May Affect India & 58 Other Nations' Credit Ratings: Here's why

A joint effort between the University of East Anglia (UEA) and the University of Cambridge has revealed unsettling insights in their study titled ‘Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness.’ This study projects a disconcerting scenario: if emission patterns remain unchanged, the credit ratings of multiple nations might plummet by two notches. Nations like Chile, Indonesia, China, and India face this disheartening possibility. Even major players like the United States, Canada, and the United Kingdom might not be immune, facing potential downgrades of up to two notches for the US and Canada and one notch for the UK. In stark contrast, during the economic upheaval caused by the COVID-19 pandemic, only 48 nations experienced significant downgrades from rating agencies between January 2020 and February 2021.

Crucial Role of Sovereign Ratings

Sovereign credit ratings are paramount as barometers of a nation’s creditworthiness. They wield considerable influence over investors’ decisions. With a staggering collective coverage of over $66 trillion in sovereign debt, these ratings and the issuing agencies dictate global capital flows.

Innovative Approach to Analysis

The study, which graced the pages of Management Science journal on August 7, 2023, introduced a groundbreaking concept – the first-ever climate-adjusted sovereign credit rating. A cohort of economists from UEA and Cambridge harnessed the power of artificial intelligence (AI) to predict the economic aftermath of climate change on Standard and Poor’s (S&P) ratings. This was conducted for 108 countries, projecting outcomes for different timeframes – the next 10, 30, and 50 years, and even the century’s end.

Patrycja Klusak, a distinguished member of UEA’s Norwich Business School and affiliated with Cambridge’s Bennett Institute for Public Policy, voiced the significance of this research, stating, “This research bridges the gap between climate science and real-world financial indicators.” Klusak emphasized that the study indicated tangible repercussions as early as 2030, predicting deeper downgrades for more countries as temperature volatility and global warming intensify.

Action Required to Avert Crisis

The study’s findings paint a grim picture for economies worldwide unless urgent actions are taken to mitigate emissions. Adhering to the Paris Climate Agreement’s guidelines – restraining temperature rise under two degrees Celsius – could yield minimal short-term impacts but substantial long-term benefits regarding credit ratings. However, emission reduction initiatives fall short; a significant average downgrade of 2.48 notches might plague 80 sovereign nations by the century’s end. Countries such as India, Canada, Chile, and China face the brunt of these potential downgrades, with India and Canada staring at a potential credit rating drop of over five notches and Chile and China facing a possible reduction of up to seven notches.

Overall, the shadows cast by climate change extend beyond environmental concerns, infiltrating the realm of global economics. The research offers a stark reminder that the future fiscal stability of nations hinges on concerted efforts to curb emissions and uphold the promises of the Paris Climate Agreement. As the world grapples with the consequences of its actions, Climate change may affect India & 58 other nations’ credit ratings hang in the balance, a testament to the far-reaching impact of climate change on our interconnected world.

Also Read: India Initiates Green Credits Draft To Reward Environment Plans

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