Sovereign rating criteria and the climate crisis: How rating agencies hinder climate action in the Global South
by Pedro Lange Machado

Abstract: This paper examines how the sovereign rating methodologies of the “Big Three” credit rating agencies – S&P, Moody’s, and Fitch – interact with the imperatives of the climate crisis and the low-carbon transition. It argues that these methodologies not only overlook climate objectives but actively constrain their pursuit by narrowing the policy space of states, particularly in the Global South. Two interrelated mechanisms drive this outcome. First, the incorporation of climate factors into rating criteria tends to lower sovereign ratings in vulnerable countries and channel climate action toward market-liberal, investor-oriented approaches. Second, the broader methodological architecture of sovereign ratings systematically penalizes reformist strategies – such as green industrial policy, strategic regulation, and debt-for-climate swaps – that are essential for a just transition. Drawing on a qualitative and interpretive analysis of CRA methodological documents and sovereign rating reports, complemented by a set of illustrative heuristic cases highlighting tensions between rating criteria and reformist climate action, the study shows how fiscal orthodoxy and creditor-centric logics are embedded in rating practices. It concludes that CRA methodologies function as enforcers of a narrow, market-conforming transition, thereby deepening climate injustice and constraining developmental autonomy in the Global South.

Keywords: climate crisis; green finance; rating agencies; sovereign rating; just transition.

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