Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322053 
Year of Publication: 
2025
Series/Report no.: 
ECB Working Paper No. 3042
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
Do sovereign credit ratings take into account physical and transition climate risks? This paper empirically addresses this question using a panel dataset that includes a large sample of countries over two decades. The analysis reveals that higher temperature anomalies and more frequent natural disasters-key indicators of physical risk-are associated with lower credit ratings. In contrast, transition risk factors do not appear to be systematically integrated into credit ratings throughout the entire sample period. However, following the Paris Agreement, countries with greater exposure to natural disasters received comparatively lower ratings, suggesting that credit rating agencies are increasingly recognizing the significance of physical risk for sovereign balance sheets. Additionally, more ambitious CO2 emission reduction targets and actual reductions in CO2 emission intensities are associated with higher ratings post-Paris Agreement, indicating that credit rating agencies are beginning to pay more attention to transition risk. At the same time, countries with high levels of debt and those heavily reliant on fossil fuel revenues tend to receive lower ratings after the Paris Agreement. Conversely, sovereigns that stand to gain from the green transition-through revenues from transition-critical materials-are assigned higher sovereign ratings after 2015.
Subjects: 
Credit ratings
Sovereign bonds
Physical risk
Transition risk
Climate change
bond
credit rating
risk management
financial risk
environmental impact
financial stability
JEL: 
G15
G24
F3
F64
H64
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-7219-2
Document Type: 
Working Paper

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