The impact of climate risks on European sovereign credit ratings and long-term borrowing costs

Climate change is a significant and material risk to the global economy. This paper investigates the impact of climate change on sovereign credit ratings and on long-term rates. The three pillars of the research are (1) the analysis of the scoring methodology of Credit Rating Agencies, (2) the empirical investigation how the climate change vulnerability risk and readiness channels into the ratings of Fitch, Moody’s, and S&P, and (3) into long-term sovereign borrowing costs. The climate change risk in credit ratings and borrowing costs has been estimated with the Arellano-Bond general method of moments (GMM) estimators. We find that the impact of climate change risks on sovereign credit ratings is not consistently negative and statistically significant. Carbon emissions have become reflected in ratings since the Paris Agreement in 2015. 1 1 The authors gratefully acknowledge the useful comments from Ian Vollbracht (JRC Ispra, S3) and Caterina Rho (JRC Ispra, B1). The finalization of the paper benefited from comments from and discussions with participants at the 7th JRC Summer School on Sustainable Finance, Italy 10-11 July 2025 and at the 7th International Conference on European Economics and Politics 12-13 June 2025, University of Milano-Bicocca, Italy.