Climate-vulnerable nations need credit rating reform

For many Small Island Developing States (SIDS), such a move could help them access more sustainable finance which would then allow them to invest in long-term climate resilience.

Principal researcher at IIED, Ritu Bharadwaj, said: “If the credit rating system isn’t reformed, these countries will remain trapped in a cycle of high debt and low growth. Their ability to adapt to worsening climate impacts will be stifled, while the global community faces escalating humanitarian and economic costs.

“When looking at the outcome of COP29, it is clear that climate finance commitments will lean heavily on private sector financing. Yet mobilising private capital at scale remains a significant challenge due to the high-risk perception of Least Developed Countries (LDCs) and SIDS.

“Without addressing these structural issues, the private sector will remain hesitant, and these nations will continue to struggle to access the resources needed for resilience, development, and growth.

“In this paper, we’re arguing for incorporating resilience investment into credit ratings. We also think there needs to be a non-punitive way of incorporating disaster-linked debt into ratings.

“More broadly, we think a new credit rating agency should be created that specialises in assessing resilience investments and development opportunities for climate-vulnerable nations.”

There is a growing push to have the issue put on the agenda at next year’s Financing for Development summit. SIDS representatives have been in New York this week to argue the case at one of the precursor meetings.

Prime Minister of Antigua and Barbuda, Gaston Browne, said: “The current credit rating system unjustly penalizes SIDS and Least Developed Countries (LDCs), failing to account for the devastating impacts of climate change. 

"Climate-induced disasters lower credit ratings, driving up borrowing costs and creating a vicious cycle of financial vulnerability that undermines investments in resilience. This systemic flaw traps our nations, preventing us from building the very measures needed to secure a sustainable future.

“Under the Fourth Finance for Development framework, it is imperative to reform how credit ratings are assessed. I call for the establishment of a new credit rating entity—one that integrates opportunities for resilience investments alongside risk assessments. Such a framework would provide a fairer evaluation of our creditworthiness and unlock the capital needed to develop sustainable, climate-resilient economies.”

Recent research by IIED shows SIDS and LDCs are spending twice as much money servicing their debts than they receive in climate finance. It also showed the situation is getting worse, with debt payments growing at a faster rate than climate support.