EDHEC venture launches ratings to price sovereign climate risk

Scientific Climate Ratings, an EDHEC Business School venture, announced the creation of Sovereign Climate Risk Ratings, a new scientific standard for understanding and pricing the macroeconomic impact of rising temperatures on sovereign economies.

Based on the academic research and expertise of the EDHEC Climate Institute and the in-depth market insights of Scientific Climate Ratings, Sovereign Climate Risk Ratings capture, for the first time, the winners and losers in a future global economy where the effects of chronic physical climate risk have real and lasting impacts on Gross Domestic Product (GDP).

These new ratings deliver economically interpretable, scenario-consistent expected macroeconomic impacts, enabling investors, asset managers and banks to put a price tag on sovereign climate risk. One of the key strengths of Sovereign Climate Risk Ratings is their subnational granularity: national GDP impacts are derived from estimates of Gross Regional Product (GRP), allowing the methodology to capture significant variations within a single country.

For example, the United States of America is a sovereign entity with high internal climate heterogeneity: projected impacts vary substantially between warmer southern states such as Arizona, Texas and Florida, and cooler northern states such as Minnesota, Montana and North Dakota. By accounting for these subregional variations and differences in population distribution, the methodology projects a GDP-per-capita loss for the US of -4.6% in 2035 and -10.4% in 2050.

The ratings provide a clear picture of winners and losers. For example, by 2035, the US has an overall grade of E, whereas most of Western Europe has grades ranging from A to C. Much of the African continent will be heavily exposed to extreme temperatures, with grades ranging from D to G. (...)