Climate Vulnerability and the Cost of Debt

30 Pages Posted: 27 Jun 2018

See all articles by Gerhard Kling

Gerhard Kling

University of London - School of Oriental and African Studies (SOAS)

Yuen C Lo

University College London - QASER Laboratory

Victor Murinde

University of London - School of Oriental and African Studies (SOAS)

Ulrich Volz

University of London - School of Oriental and African Studies (SOAS) - Economics; Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE)

Date Written: June 18, 2018

Abstract

We use indices from the Notre Dame Global Adaptation Initiative to investigate the impact of climate vulnerability on bond yields. Our methodology invokes panel ordinary least squares with robust standard errors and principal component analysis. The latter serves to address the multicollinearity between a set of vulnerability measures. We find that countries with higher exposure to climate vulnerability, such as the member countries of the V20 climate vulnerable forum, exhibit 1.174 percent higher cost of debt on average. This effect is significant after accounting for a set of macroeconomic controls. Specifically, we estimate the incremental debt cost due to higher climate vulnerability, for the V20 countries, to have exceeded USD 62 billion over the last ten years. In other words, for every ten dollars they pay in interest cost, they pay another dollar for being climate vulnerable. We also find that a measure of social readiness, which includes education and infrastructure, has a negative and significant effect on bond yields, implying that social and physical investments can mitigate climate risk related debt costs and help to stabilize the cost of debt for vulnerable countries.

Keywords: Climate Risk, Climate Vulnerability, Cost of Debt, V20, Climate Change

JEL Classification: G12, H63, Q5

Suggested Citation

Kling, Gerhard and Lo, Yuen and Murinde, Victor and Volz, Ulrich, Climate Vulnerability and the Cost of Debt (June 18, 2018). Available at SSRN: https://ssrn.com/abstract=3198093 or http://dx.doi.org/10.2139/ssrn.3198093

Gerhard Kling

University of London - School of Oriental and African Studies (SOAS) ( email )

Thornhaugh Street
Russell Square: College Buildings 541
London, WC1H 0XG
United Kingdom

Yuen Lo

University College London - QASER Laboratory ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Victor Murinde

University of London - School of Oriental and African Studies (SOAS) ( email )

Thornhaugh Street
Russell Square: College Buildings 541
London, WC1H 0XG
United Kingdom
02078984057 (Phone)

HOME PAGE: http://https://www.soas.ac.uk/staff/staff120377.php

Ulrich Volz (Contact Author)

University of London - School of Oriental and African Studies (SOAS) - Economics

London, WC1E 7HU
United Kingdom

Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE) ( email )

Tulpenfeld 4
Bonn, 53113
Germany

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