A reassessment of the relationship between environmental vulnerability and sovereign default risk

We study the causal effect of environmental vulnerability on sovereign default risk. We identify this effect using a double machine learning estimator that isolates exogenous variation in environmental exposure while flexibly controlling for institutional and macroeconomic confounders. Using a panel of 143 countries from 1995 to 2022, we find that countries classified as highly environmentally vulnerable face a 9 percent higher probability of default compared to otherwise similar peers. This effect is substantially larger than previous correlational estimates and highlights the importance of separating environmental risk from institutional quality. Our findings suggest that climate vulnerability independently contributes to sovereign fragility, with implications for debt sustainability, market access, and climate-finance strategies. JEL Classification: C21; F34; Q54