How Climate Change Will Destroy Your Country's Credit Rating

Author: Todd Woody

We all know that climate change threatens to devastate coastal cities, disrupt food production, and trigger a refugee crisis of untold proportions. It’s also bad for a nation’s credit rating, according to a report released Thursday by Standard & Poor’s.

That would be seem to be the least of the worries of, say, Vietnam, which S&P ranked dead last of 116 countries’ vulnerability to climate change-related credit risk. (Investors, on the other hand, might want to bet on Luxembourg, which was deemed least vulnerable to climate catastrophe.)


Yet those countries most at risk from global warming­—primarily those in low-lying Southeast Asia and Africa—are precisely those that will need to tap global credit markets to both prepare for ever-stronger hurricanes and super-typhoons like the one that struck the Philippines last November, as well as deal with the aftermath. And if the world’s governments ever get their act together on a plan to reduce greenhouse gas emissions—don’t hold your breath—those countries will need investment to switch to carbon-free renewable sources of energy.

“Extreme weather events, especially floods, can be expected to increasingly take a toll on a country's infrastructure and thus productivity, exacerbating weakening endowment of productive infrastructure observable in a number of countries,” wrote the report’s authors. “National budgets would invariably come under additional strains, potentially putting downward pressure on sovereign ratings as debts and deficits mount.”

S&P has yet to change any country’s credit rating based on its vulnerability to climate change, noting that the complexity of the phenomenon makes it difficult to assess the specific impact on any one nation.

Yet clearly the rating agency is thinking about it. In the report, S&P scored a nation’s vulnerability to climate change-related credit risk according to what percentage of its population lives in coastal areas that are 16 feet or less above sea level; agriculture’s share of gross domestic product, given food production is highly dependent on climate; and its ranking on the Notre Dame University Global Adaptation Index, which measures a country’s ability to adapt to climate change.


No surprise that the most vulnerable countries are poor, agricultural-intensive nations located in regions of the world already prone to typhoons and flooding. Nearly half of Vietnam’s population, for instance, lives in low-lying coastal areas. And agriculture accounts for about 20 percent of its GDP.

The story is similar for the other most countries deemed by S&P to be most vulnerable—such as Bangladesh, Senegal, Mozambique, Fiji, and the Philippines


Countries most resilient to climate change-related credit risk are landlocked nations with few farmers such as Luxembourg, Austria and Switzerland. The United States ranked No. 10, and nine of the 10 least vulnerable countries are in Europe.


But don’t take too much comfort in that. As S&P notes, climate change is a global catastrophe and there really is nowhere to hide.

“We expect the significance of this mega-trend in assessing sovereign risk to only increase over coming decades, as evidence of the economic implications of climate change and extreme weather events becomes ever more visible,” the report states.