Anticipating climate change risks on sovereign bonds, Part 2

Regulators and international institutions require financial risks assessment of climate change, however the practical methodology frameworks available are lacking. This paper provides an innovative and practical methodology that measures the financial impact of climate change risks on sovereign fixed-income assets.

Learn more about the climate change risks assessed:

• What's the difference between physical and transition risks, and what scenarios are used to assess them?
• What is a "hot house" world scenario? What is a "disorderly transition" scenario? How are these scenarios calculated?

The main findings:

• Physical risks will mainly affect emerging market economies based in areas that are most impacted by climate change, while advanced economies that emit more greenhouse gases and are more carbon-dependent will be mostly affected by transition risks
• The probability of sovereign defaults is likely to increase over time and could undermine the creditworthiness of economies with weak fiscal capacity
• Therefore, sovereign bond yields for these economies could diverge sharply, affecting returns for investors

To read the full research paper click here.

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