SOAS Research Online

Abstract

This report represents the first systematic effort to assess the relationship between climate vulnerability, sovereign credit profiles, and the cost of capital in developing countries. Climate risks are multi-dimensional, covering a range of geophysical, social, and economic issues. The intensification of these risks and the degree to which they are accurately priced by financial markets are of increasing concern to global economic stability. Integrating climate risks into financial decision-making is crucial to long-term economic and financial stability as these risks affect return on investment. Broader recognition of these risks will be necessary for sustainable development. For every USD 10 paid in interest by developing countries, an additional dollar will be spent due to climate vulnerability. This financial burden exacerbates the present-day economic challenges of poorer countries. The magnitude of this burden will at least double over the next decade. The climate consequences on poorer countries’ cost of capital and overall fiscal health need to be addressed. A range of existing policy and market responses can build climate resilience in vulnerable countries and deliver demonstrable financial benefits. Investments that enhance the resilience of climate vulnerable countries are crucial to not only helping vulnerable countries deal with the consequences of climate risks, but also bring down their cost of borrowing.