Climate vulnerability and the cost of debt

Gerhard Kling, Yuen C Lo, Victor Murinde and Ulrich Volz

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We present the first systematic investigation of the impact of climate vulnerability on the cost of sovereign debt using a sample of 46 developing and advanced countries from 1996 to 2016. We find that a subgroup of 25 developing countries with higher exposure to climate vulnerability—all of which are members of the V20 climate vulnerable forum—exhibit, on average, a 1.174% higher cost of debt. We estimate that 40 members of the V20 paid USD 62 billion in additional interest from 2007 to 2016 due to their climate vulnerability. We also find that a measure of social readiness has a negative impact on bond yields, suggesting that social and physical investments in adaptation and resilience can help mitigate climate risk-related financing costs. Our findings indicate that climate vulnerability can threaten sovereign debt sustainability and cause financial exclusion, thereby undermining investment in adaptation and accelerating a vicious cycle of climate vulnerability, debt and underdevelopment.

JEL-codes: G12 H63 Q54 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2025-09-23
New Economics Papers: this item is included in nep-fdg
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Published in Oxford Open Economics, 23, September, 2025, 4. ISSN: 2752-5074

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:129272

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