Climate Change and Sovereign Risk

1 Overview and main findings 5. 2 Climate risk vulnerability, resilience to climate risk, and the cost of sovereign borrowing 5. 3 Empirical results 6. What Are the Implications for Macrofinancial Governance? 6. 1 Conduct a comprehensive vulnerability assessment and develop a national adaptation plan 6. 2 Mainstream climate risk analysis in public financial management 6. 3 Adjust monetary and prudential frameworks to account for climate risks 6. 4 Implement financial sector policies to scale-up investment in climate adaptation and resilience and develop insurance solutions 6. 5 Provide international support to mitigate and manage climate-related sovereign risk 6. 6 Summary 7. Summary and Recommendations References Appendix to Chapter 5 v Figures, Tables, and Boxes Figures 1 S&P's sovereign issuer criteria framework 2 Moody's primary transmission channels from physical climate change 3 Moody's environmental considerations for sovereigns 4 Transmission channels of risk 5 Sustainable Development Goals wedding cake 6 Relative total GDP purchasing power parity per HydroSHEDS 7 Revenue from comprehensive carbon taxation in 2030, selected countries (% of GDP) 8 Economic impact of climate change on the world 9 Long-term impact of a temperature increase for a representative low-income developing country 10 From physical risk to financial stability risks 11 From transition risk to financial stability risks 12 Number of relevant weather-related loss events worldwide and overall and insured losses in US billion (in 2018 values), 1980-2018 13 Effects of inequality of disadvantaged groups 14 Conceptual framework of the direct and indirect effects of climate change on resource availability and potential conflict and cooperation dynamics 15 Change in the number of days in a year where the daily temperature is projected to exceed the local 90th percentile in 2030-2040 16 Change in the number of days in a year when the daily rainfall volume is projected to exceed the historical local 95th percentile in 2030-2040 17 Projected change in wildfire potential in 2030-2040 18 Projected water stress risk in ASEAN countries in 2040 19 Historical occurrences of extreme weather events in ASEAN, 1900-2019 20 Average annual loss as percentage of GDP, by country 21 Annual expected fiscal burden arising as a consequence of natural disasters as a percentage of annual government expenditure 22 Estimated probable fiscal burden arising as a consequence of a 1-in-200-year probable maximum economic loss event as a percentage of annual government expenditure 23 Average additional investment required per year, 2016-2030 (US billion) 24 Proportion of ASEAN transport infrastructure exposed to climate hazards 25 Exposure of the Philippines transportation infrastructure to floods 26 Role of agriculture in GDP and employment, 2019 27 Average annual agricultural loss as percentage of GDP 28 Proportion of Viet Nam's manufacturing facilities exposed to each climate hazard 29 Composition of ASEAN countries' exports, 2018 30 Fuel exports (% of merchandise exports) vs merchandise exports as share of GDP 31 Fuel imports (% of merchandise imports) vs merchandise imports as share of GDP 32 ASEAN countries' trade balance for goods (in US billion), including (straight line) and excluding (dotted line) mineral fuels 33 Carbon footprint of exports (tCO2e/US) vs exports of goods and services as share of GDP (%) for ASEAN countries and OECD in 2015 34 Political stability and absence of violence and/or terrorism, 2018 Figures, Tables, and Boxes vi 35 Cost of sovereign debt and climate risk vulnerability, 2002-2017 36 Cost of sovereign debt and climate risk resilience, 2002-2018 37 Sovereign bond yields, climate risk, and resilience by country grouping 38 The impact of climate risk vulnerability and climate risk resilience on the cost of sovereign borrowing 39 Adaptation cycle under the United Nations climate change regime Tables 1 Fitch Ratings's sovereign rating criteria 2 Fitch Ratings's environmental relevance score 3 Nine "tipping points" that could be triggered by climate change 4 Climate-related fiscal risk factors and illustrative climate change channels 5 The 20 most damaging natural disasters, 1998-2019 6 Basic elements of climate change adaptation 7 Estimated rents from the extraction of oil, natural gas and coal resources in G20 countries 8 Macroeconomic impacts of climate change 9 Percentage loss in GDP per capita by 2030, 2050, and 2100 in the RCP 2. 6 and RCP 8. 5 scenario 10 Risk channels, potential effects and relevant indicators 11 Projected water stress ranking for ASEAN countries for 2040 under a business-as-usual scenario 12 Climate Risk Index for 1999-2018 13 Impacts of climate-related disasters in ASEAN countries, 2000-2019 14 Losses from weather-related events, 1993-2018 15 Depletion of natural capital across Southeast Asia 16 Historic contingent liabilities of ASEAN countries, 1990-2019 17 Emissions and total investment to achieve Nationally Determined Contributions-scenario and enhanced low-carbon goals in Indonesia and Viet Nam 18 Percent loss in GDP per capita in Southeast Asian countries by 2030, 2050, and 2100 under the RCP2. 6 and RCP8. 5 scenarios 19 Impacts of global warming (3C) on the GDP of Southeast Asian countries 20 Projections on the GDP of ASEAN countries under different climate change scenarios 21 Percent of manufacturing facilities with at least high risk to climate hazards 22 Toolbox of sustainable monetary policy, prudential, and other measures for central banks and supervisors 23 Summary of current regulatory treatment of sovereign exposures under the Basel regulatory framework 24 Overview of policies to mitigate and manage climate-related sovereign risk Boxes 1 The PRI Credit Risk and Ratings Initiative's statement on ESG in credit risk and ratings 2 The Coral Triangle 3 Methodology and data