Recent research on the relationship between climate vulnerability, sovereign credit profiles, and the cost of capital in climate-vulnerable developing countries shows that these countries incur a risk premium on their sovereign debt, reducing their fiscal capacity for investments into climate adaptation and resilience. This raises serious questions about the impacts of climate risk on the sustainability of public finances for climate-vulnerable countries whose fiscal health is also threatened by output losses related to climate hazards and disaster recovery costs, as well as transition risks that may hit specific sectors or the economy at large.

This workshop will examine the nexus between climate risk and sovereign risk in Southeast Asia, a dynamic that is an increasing focus of rating agencies but has been little studied compared to the macroeconomic impacts of climate change. It will also explore how the climate-sovereign risk nexus may be integrated into the operational frameworks of central banks and supervisors to help them maintain price and financial stability, thus contributing to broader macroeconomic stability.

The workshop will mark the start of a research project co-funded by ADBI, the Climate Works Foundation, and the International Network for Sustainable Financial Policy Insights, Research, and Exchange (INSPIRE). The project is co-organized by ADBI, the SOAS Centre for Sustainable Development, World Wildlife Fund’s Asia Sustainable Finance team, and Four Twenty Seven.

Objectives
To identify the channels through which climate-related risks affect sovereign risk as well as the scale of the impacts in Southeast Asia.
To examine the monetary policy, regulatory and supervisory implications for financial supervisors and central banks in the region.