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Sovereign risk: climate transition analysis at the country level

WTW’s Climate & Resilience Hub is home to the world’s leading services for climate analytics, assessments and advisory on transition risk at the country level.

Since 2016, the Climate Transition Analytics team has been advising governments, central banks and development finance institutions on the impact that a low-carbon transition could have on public finances.

As part of the CTA’s sovereign risk programme, the Climate Transition Value at Risk methodology has been applied in several countries covering South America, Sub-Saharan and North Africa, South-east Asia and the Pacific regions and Europe.

WTW’s analysis supports the management of more efficient and resilient economies by identifying the most important concentrations of climate transition risk that could potentially destabilise a country if left unmonitored and unmanaged. Targeted policy, regulatory and policy interventions can then be designed, and implemented alongside more traditional top down “stress tests” of the economy and the financial system.

The CTA has published two case studies. In South Africa, we found that climate transition risk in the country’s important thermal coal export sector could amount to more than $80 billion between 2018 and 2035 alone – equivalent to almost one-third of annual GDP. In Uganda, we found that the value of oil and gas reserves would be 56% lower in a Paris-aligned world than the reserves had originally promised. In East Africa, new fossil fuel-related infrastructure may bring short term economic returns to countries such as Mozambique and Tanzania in the 2020s but will lock in long-term inflexibility.

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