Towards a new way of assessing sovereign risk – Part 2: New methods to measure sustainable growth
Traditional economic indicators, such as GDP, do not capture a range of material credit risk factors. Although this applies to many different areas of the economy, in this series of reports we take a close look at the effects of climate change and how that could impact sovereign credit quality.
In Part 1, “Where will the current path take us?”, we looked at where the current path, with a rising greenhouse gas (GHG) emissions gap and large inequalities in current and historical emissions, may take us. In the absence of mitigating actions, climate change will increasingly disrupt economic activity, with likely non-linear impact as climate hazards interact and as tipping points are reached. If average global temperature rises are to stabilise at 1.5-2.0 degrees Celsius, carbon emission prices will need to increase further. In turn, this could have a major impact on economic growth, inflation, and asset prices.
In Part 2, “An alternative mindset”, we examine the rating agencies and the ESG rating providers and how they assess ESG-related risks for sovereigns. We also present alternative approaches to determine ESGrelated risks for sovereigns, using the Nordic countries as an example. Both traditional credit rating agencies and ESG rating providers have a strong income bias, with a risk of underestimating sovereign related climate risks and costs. To be more forward-looking and proactive, we believe that a complementary analytical framework is needed.
In Part 3, “The Nordic transition opportunity”, we will look at the forthcoming Nordic transition, including green and sustainable financing trends. The sustainability transition will require large investments, both globally and across the Nordic region. Generally, the debt capacity among the Nordic countries is strong, with good potential to support the decarbonisation process. Due to the decarbonisation process and company “reshoring”, new green value chains will emerge. Considering the large commodity resources that are spread across the countries, the Nordic region will be important for the whole European transition.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
