Sovereign Debt in a Warming World: Are Credit Ratings Responding to Climate Risks?

ABSTRACT Investors and policymakers increasingly worry that climate change threatens sovereign debt. While recent studies find a negative effect, they typically estimate models assuming a time‐invariant impact and rely on climate variables endogenous to economic and policy conditions. This paper addresses both concerns by employing a long‐horizon, nonactionable, external measure of climate risk from the Notre Dame Global Adaptation Initiative, interacted with year‐fixed effects to capture any time‐varying impacts. Analyzing sovereign issuer default ratings from major agencies, I find no evidence that climate risk systematically affects ratings or that its influence has evolved over time. I confirm these results using climate disaster data from the Emergency Events Database. These findings likely reflect credit rating agencies' short‐ to medium‐term focus on economic fundamentals rather than on long‐term climate risks.