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

This paper presents an empirical assessment of how climate‑related risks shape sovereign credit ratings and long‑term borrowing costs across the EU‑27 and the United Kingdom. It examines why and how climate vulnerability, climate readiness, and greenhouse‑gas emissions influence the methodologies and outcomes of Fitch, Moody’s, and S&P, using a dynamic panel framework and Arellano–Bond GMM estimators. The paper highlights that climate risks affect multiple rating pillars—economic, fiscal, institutional, external, monetary, and event‑risk—and that carbon‑intensive profiles have become more visible in ratings since the Paris Agreement. 

The paper recommends strengthening the integration of climate risk into sovereign debt management, regulatory frameworks, and credit rating methodologies. It calls for more transparent climate‑risk disclosures by rating agencies, the adoption of alternative and less endogenous climate indicators, and the embedding of climate vulnerability assessments into fiscal and debt‑sustainability analyses. The authors conclude that more systematic incorporation of climate metrics would support resilient public finances and provide clearer signals to investors and policymakers.