“Nature”, a weekly international journal distributing peer-reviewed research, published an analysis that warns against the risks of a severe debt crisis if climate change is not taken into account when governments lend money during the pandemic. The text suggests three steps that match the DRGR proposal.
The analysis by Arjuna Dibley, Thom Wetzer and Cameron Hepburn finds that the largest part of countries did not consider the risks of climate change influencing their credit-worthiness when borrowing money during the COVID19-crisis.
An omission with potentially dangerous consequences: “Evidence is mounting that a severe future climate shock, such as a long-term drought in a country reliant on agriculture or the collapse of fossil-fuel industries, could cause government defaults and a credit crisis. Revaluations in anticipation of such an event could also trigger this”, the authors argue.
After a detailed explanation of the threat, the text goes on by stating that this vulnerability can be avoided if climate change is taken into account by governments that are issuing sovereign bonds to raise money – and if the gained financial leeway is used for green recovery.
The authors propose three measures to avoid COVID-19 lending that might fuel the climate and debt crisis that match the DRGR report:
“Researchers, governments and financial institutions should take three straightforward steps to remedy the situation.
- First, they must work together to better assess, disclose and manage vulnerability to sovereign climate risk.
Extract: A standardized reporting framework tailored to countries rather than companies, similar to the TCFD, could be developed. Once that is in place, stock exchanges could update listing guidance and standardized rules for climate risk disclosure in debt markets.
- Second, governments should use COVID-19 credit to mitigate climate risk, build climate resilience and expand the economy to aid future debt repayment
Extract: The advent of green sovereign bonds, which incentivize the borrower to use funds for green purposes such as reducing emissions, and the attention which credit agencies pay to measuring resilience, suggest that bond markets will reward such efforts with lower interest rates.
- Third, wealthier lender countries and their development finance institutions should provide financial support to the most vulnerable borrower countries.
Extract: The institutions should buy back debt from heavily indebted poorer countries, on the condition that the money is used to increase climate resilience rather than servicing the debt.”