Climate Vulnerability and the Cost of Debt

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

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 1996-2016. 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 2007-2016 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.

Citation

Kling, G., Lo, Y. C., Murinde, V., & Volz, U. (online). Climate Vulnerability and the Cost of Debt. Oxford Open Economics, Article odaf003. https://doi.org/10.1093/ooec/odaf003

• Journal Article Type: Article
• Acceptance Date: Aug 13, 2025
• Online Publication Date: Aug 16, 2025
• Deposit Date: Aug 30, 2025
• Publicly Available Date: Aug 30, 2025
• Journal: Oxford Open Economics
• Electronic ISSN: 2752-5074
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Article Number: odaf003
• DOI: https://doi.org/10.1093/ooec/odaf003
• Keywords: Climate vulnerability, cost of debt, V20 countries, climate change, financial exclusion
• Publisher URL: https://academic.oup.com/ooec/advance-article/doi/10.1093/ooec/odaf003/8236479