Scientific Climate Ratings spotlights nations most at risk for economic fallout due to climate change 

Sovereign Climate Risk Ratings quantifies the future effects of chronic physical climate risk on the GDP of 190+ nations and 3K+ subregions, filling a sovereign pricing market blind spot

Scientific Climate Ratings, an EDHEC Business School venture, is proud to announce 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. 

 Sovereign Climate Risk Ratings are calculated at two reference horizons, 2035 and 2050, providing investors with standardised benchmarks for comparing countries over time. Annual time series are also available, allowing users to analyze the evolution of projected impacts at specific intervals. Each country receives a letter grade from A to G, with G representing the highest level of exposure. 

These grades 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. (See appendices for more information.) The table below illustrates the range of projected impacts across a selection of major economies, highlighting how exposure can vary significantly even among G20 countries. 

Table: Projected GDP-per-capita impacts in 2035 and 2050 under the Expected Scenario, and 2035 Sovereign Climate Risk Ratings, for a selection of G20 economies 

To put these figures into perspective, the US economy contracted by 3.5% in 2020 due to the Covid-19 pandemic—its sharpest annual decline since 1946. Unlike the Covid-19 shock, however, climate-related economic losses are not expected to be temporary: they are expected to intensify further by 2050. 

“Climate change is a global phenomenon, but climate risk is local and financial. Our framework captures the structural, compounding output losses caused by chronic warming at the regional level and aggregates them into sovereign-level impacts,” said Rémy Estran-Fraioli, PhD, CEO of Scientific Climate Ratings. “It provides the missing transmission channel between climate warming and sovereign fundamentals, identifying structural exposure before spreads fully adjust.” 

Sovereign Climate Risk Ratings and their underlying macroeconomic impacts are available across nine forward-looking climate pathways: the seven scenarios published by the Network for Greening the Financial System (NGFS), complemented by two higher-warming pathways, Climate Breakdown and Climate Destabilisation. The framework also includes an Expected Scenario, derived from the probability-weighted aggregation of these nine pathways, which serves as the reference basis for the sovereign rating scale. Together, these form the Scientific Climate Scenarios developed by the EDHEC Climate Institute.  

“Chronic risks rarely dominate headlines, but increasingly, they are impacting a nation’s gross productivity, thereby reducing growth potential,” said Nicolas Schneider, PhD, Senior Research Engineer-Macroeconomist at the EDHEC Climate Institute. “Our framework quantifies this risk as an unconditional expectation that can be added to investors’ financial models. The competitive edge of this rating is the early identification of structural sovereign exposure before it is priced into market spreads.”  

Sovereign Climate Risk Ratings cover chronic physical risk arising from temperature-driven productivity shifts across 191 countries and more than 3,400 subnational regions, which together represent over 95% of global economic output. The framework will continue to evolve through additional quantitative metrics, enhanced granularity and the progressive integration of estimates of expected sovereign spread adjustments.

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