(Bloomberg) -- Some bond investors may be facing bigger default risks than their models indicate.Most Read from BloombergEric Adams' Vanishing Promise to Fix...
It’s a concern voiced by a growing number of researchers studying the impact of climate change on bond markets . Their overwhelming conclusion is that credit ratings are currently failing to capture the threat that extreme weather shocks pose to sovereign debt holdings.
It’s an area of concern that’s attracted the attention of researchers at Barclays Plc, the University of Cambridge and the Chinese Academy of Sciences, among others. A study by academics at the University of Oxford found that current ratings methodologies are “mispricing” risk in the global sovereign bond market, a blind spot they say has “potential systemic implications.”
“We live in a much more concrete world, and there are plenty of other factors that weigh more heavily in their impact” than climate events, he said. “It matters over the long term,” Dennis Shen, senior director at Scope, said in an interview. “If nations do nothing on climate they’re likely to be penalized in their sovereign ratings.”
ICE, which in its climate research points to the failure of ratings firms to competently identify bond risks ahead of the 2008 financial crisis, notes that the countries most at risk of climate-related downgrades are also some of the most economically vulnerable. In an analysis of flood-prone Thailand, which has a debt-to-GDP ratio of about 60%, Bernhofen’s team showed that flooding may “result in significant capital stock and macroeconomic losses,” creating the “potential for sovereign credit rating downgrades, both today and in the future.”
Climate Change Sovereign Debt Bloomberg Climate Risk Sovereign Ratings Default Risk Bond Investors Sovereign Bond Evan Kodra Bond Markets Sovereign Credit
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