Instead, existing studies have tended to focus on the physical risks of climate change. Partnership, assistance, financial support and technology transfer from advanced countries to developing countries will therefore be critical in assisting them to successfully transition to cleaner economies.ĭr Laura Ryan, Head of Research, Ardea Investment Management, comments: “Until this report, there has been relatively little research on climate change transition risk and its impact on sovereign borrowers. Renewable energy is an economically and statistically significant mitigation strategy, as supply and consumption of clean fuel sources could drive economic growth, counteracting short-term financial losses from the non-renewable energy sector.
The study highlights that moving to clean energy is easier in advanced countries which have the capacity to borrow at lower costs, have higher GDP per capita and are more resilient to economic shocks. Meanwhile, reductions on natural resources rents in advanced countries are associated with lower sovereign bond yields and spreads.ĭeveloping countries with high dependence on natural resources are also associated with lower sovereign borrowing costs but increases in renewable energy consumption are associated with increased sovereign borrowing costs. The study found that reduced carbon dioxide emissions are associated with lower sovereign borrowing costs. The analysis aligns with the UN Sustainable Development Goals (“SDGs”) - specifically, SDGs 13, 12 and 7 - carbon dioxide emissions, earnings from natural resources extraction and renewable energy consumption.Ĭlimate transition risk has two principal ways of impacting yields – directly, through risk factors, and indirectly, through macro-economic variables such as GDP. Using data from 23 advanced and 16 developing markets from 2000 to 2019, the joint research paper provides an analytical framework for fund managers, investors and policy makers to assess a country’s transition risk. However, there is a limited body of existing literature examining the impacts of physical climate change risk, particularly transition risk, and its effects on sovereign bonds yields. As the world transitions towards a greener and more sustainable economy, countries are increasingly subject to climate change transition risk.
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