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Report Finds Increasing Cost of Borrowing in Developing Countries Due to Climate Change

July 06, 2018 |

This article was originally published on IISD.

“Researchers from Imperial College Business School and the School of Oriental and African Studies (SOAS) University of London, UK, published a report assessing the physical impacts of climate change on countries’ borrowing costs. The study finds that the cost of borrowing will increase over time, and identifies measures to mitigate climate risk.

Commissioned by the UN Environment Programme (UNEP, or UN Environment), the report is the first systematic effort to study the relationship between climate vulnerability, sovereign credit profiles and cost of capital in developing countries. Titled ‘Climate Change and the Cost of Capital in Developing Countries,’ the research focuses on impacts in the 48 members of the Climate Vulnerable Forum (CVF) and the Vulnerable 20 Group (V20), using case studies from Bangladesh, Barbados, Guatemala, Kenya and Viet Nam.

…Credit ratings, determined by rating agencies, represent a borrower’s credit risk. The report finds that although no country’s sovereign credit rating has been downgraded by a major credit rating agency due to climate risk alone, these ratings are likely to incorporate climate risks in other ways. The authors identify four ways that climate change can be captured in countries’ sovereign credit profiles: through economic impacts, damage to infrastructure, rising social costs, and population shifts due to forced displacement.

The report highlights that for every US$10 in interest paid by developing countries, an additional dollar will be spent due to climate vulnerability, adding to these countries’ financial burden and exacerbating their economic challenges. The report’s underlying models find that, in the past ten years, climate vulnerability has cost V20 countries an additional US$62 billion in interest payments, including US$40 billion in additional interest payments on government debt alone. Future additional interest payments due to climate vulnerability are projected to increase, up to US$168 billion over the next decade. These payments, the authors note, are separate from economic losses suffered as a result of climate change, which compound the issue by reducing countries’ ability to invest in climate change mitigation and adaptation measures…”

Read on at: IISD.

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