Climate Vulnerability and the Cost of Debt

We present the first systematic investigation of the impact of climate vulnerability on the cost of sovereign debt using a sample of 46 developing and advanced countries from 1996-2016. We find that a subgroup of 25 developing countries with higher exposure to climate vulnerability – all of which are members of the V20 climate vulnerable forum – exhibit, on average, a 1.174% higher cost of debt. We estimate that 40 members of the V20 paid USD 62 billion in additional interest from 2007-2016 due to their climate vulnerability. We also find that a measure of social readiness has a negative impact on bond yields, suggesting that social and physical investments in adaptation and resilience can help mitigate climate risk-related financing costs. Our findings indicate that climate vulnerability can threaten sovereign debt sustainability and cause financial exclusion, thereby undermining investment in adaptation and accelerating a vicious cycle of climate vulnerability, debt and underdevelopment.