First Climate-adjusted Sovereign Credit Rating
Context:
- New research claimed to be the first climate-adjusted sovereign credit rating has found links between the creditworthiness of countries and the impact of climate change.
- A team of economists at UEA and Cambridge used artificial intelligence (AI) to simulate the economic effects of climate change on Standard and Poor’s (S&P) ratings for 108 countries over the next 10, 30 and 50 years and by the end of the century.
- If emissions aren’t reduced, around 59 countries might experience a decline in their sovereign credit ratings, including India.
- Over the next decade, there could be a rise in global corporate debt.
- According to research from the University of East Anglia and the University of Cambridge, countries like Chile, Indonesia, China, and India could see a two-notch drop, while the United States, Canada, and the United Kingdom could also experience a two-notch or one-notch reduction.
- The results showed that many national economies can expect downgrades unless action is taken to reduce emissions.
- The study suggested adherence to the Paris Climate Agreement, with temperatures held under a two-degree rise, would have no short-term impact on sovereign credit ratings and keep the long-term effects to a minimum.
- Sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity.
- Significance: It can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
- At the request of the country, a credit rating agency will evaluate its economic and political environment to assign it a rating.
- Various entities involved in credit rating in India include CRISIL, ICRA, Fitch Ratings, etc.