A1478
Title: Climate risks and sovereign risks nexus
Authors: Sofia Anyfantaki - Athens University of Economics and Business and Bank of Greece (Greece)
Marianna Blix Grimaldi - Swedish Riksbank (Sweden) [presenting]
Carlos Madeira - BIS (Switzerland)
Simona Malovana - Czech National Bank (Switzerland)
Georgios Papadopoulos - Bank of Greece (Greece)
Abstract: Governments are exposed to a significant range of climate-related risks, which can, in turn, affect government spending and the value of government bonds. Surprisingly, few studies have thoroughly analyzed the effects of these climate risks on sovereign debt. The impact of both physical and transition risks on sovereign bond yields is investigated, making a clear distinction between chronic and acute physical risks. By employing panel regression models on a comprehensive dataset of 57 countries, the influence of various climate risks is estimated, and the local projection method is used to examine physical risks in greater detail. Findings reveal that both transition risks and chronic physical risks generally lead to an increase in government bond yields, although the extent of this impact varies considerably across different countries and regions. Interestingly, severe, short-term physical risks appear to have minimal influence on sovereign bond yields in emerging and developing economies. This suggests that financial markets may not yet fully account for climate risks in their pricing. The importance of investigating sovereign bond markets is underscored by the fact that these bonds often constitute a significant portion of asset portfolios. As such, understanding the intersection between climate risks and sovereign debt is crucial for investors and policymakers alike.
