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Climate change poses a growing structural risk to national economies, yet the long-term economic effects of gradual, chronic physical risk remain insufficiently reflected in sovereign risk assessments and market prices, which tend to respond more to acute shocks and transition signals. In this article, Nicolas Schneider, Senior Research Engineer – Macroeconomist at the EDHEC Climate Institute, presents the Sovereign Climate Risk Rating (SovCRR), a framework that quantifies the expected economic impact of temperature-driven chronic physical risk and makes it more directly usable in sovereign credit analysis.
The SovCRR addresses a key limitation of conventional approaches: national averages can obscure large differences in climate exposure and economic vulnerability within a country. The methodology instead estimates damages for more than 3,400 sub-national regions, using historical economic and climate data and downscaled climate projections. It then aggregates them to the national level across nine forward-looking scenarios (the seven NGFS Phase V scenarios plus two higher-warming extensions), producing probability-weighted impacts on GDP per capita for 2035 and 2050.
The framework pairs an economically interpretable measure, the expected percentage change in GDP per capita relative to a counterfactual without further climate change, with a relative A to G rating. Countries are ranked by expected impact and placed into seven roughly equal bands, from A (least exposed) to G (most exposed). Scenario-specific results and regional drivers remain accessible, so the metric can feed macroeconomic forecasts, sovereign credit assessments, debt-sustainability analysis and portfolio risk management.
A US case study shows why granularity matters. The national average temperature sits just below the estimated optimum, which could make exposure look benign. Yet more than 40% of US economic activity is in southern states already above the threshold where losses accelerate, and northern gains don’t offset them. Expected GDP per capita losses by 2050 reach about 13.7% in Arizona and Texas, versus about 7.5% in New York. Nationally, the model estimates a 10.4% reduction by 2050 under the probability-weighted expectation, an E rating, with a scenario range of roughly -4.1% to -14.9%.
By translating regional climate impacts into transparent, forward-looking economic indicators, the SovCRR offers a framework for addressing a structural blind spot in sovereign risk pricing. It supports more informed assessments of long-term climate exposure and provides investors with a systematic basis for integrating physical climate risk into financial decision-making.