Decoding climate-related risks in sovereign bond pricing

The Bank for International Settlements has published a working paper analyzing the impact of climate-related risks on sovereign bond yields globally.

• The study covers 52 countries from 2000 to 2023, examining transition risks (carbon emissions per capita) and physical risks (temperature changes, weather disasters).
• Key findings include higher sovereign yields linked to transition risks, especially in developing and high-emission countries post-Paris Agreement, no significant pricing of temperature changes, and increased borrowing costs after weather disasters, notably for poorer and highly indebted countries.
  This research highlights the importance of fiscal solvency considerations for countries vulnerable to climate-induced natural disasters as these risks intensify.