S&P: Climate Change is a Global Mega-Trend with an Impact on Sovereign Creditworthiness

On May 15th Standard & Poor’s Rating Services issued Climate Change is a Global Mega-Trend for Sovereign Risk, a report about the potential impacts of climate change on sovereign credit ratings of countries around the world.  In its report, S&P explains how the costs of inaction on climate change in response to increasing frequency and destructive force of extreme weather events will become large enough to adversely influence countries’ credit ratings.

S&P labels climate change as a new mega-trend that is increasingly part of public discussion on global economic risks.  The report makes it clear that our lack of understanding of climate change and the interconnected nature of ecological systems make it difficult to predict precisely if and when global warming and changing weather patterns will outweigh other economic trends or risks for most sovereign nations.  It particularly specifies three factors that make climate change a challenging problem to control.

• First, the inherent intricacy of science provides a wide array of possible outcomes and interpretations which leave significant uncertainties and controversies about how climate change will impact national economies and financial systems.  Since the benefits from taking remedial measures lie in the distant future whereas the immediate consequences of taking action are unpopular among current electorates, the uncertainty about future climatic conditions hinders political action.
• Second, the nature of global collective action leads to the famous prisoner’s dilemma.   Due to the global character of climate change, most benefits from sacrificial efforts of individual societies to respond to climate change will accrue to other nations, resulting in an incentive structure that leads to uncooperative outcomes and to little effective risk mitigation.
• Third, the expectation of disproportionate impact on poorer countries with less clout in international negotiations further exacerbates the international coordination problem.

S&P:  Climate Change is a Global Mega-Trend with an Impact on Sovereign Creditworthiness