Biodiversity loss could hurt countries' ability to borrow money, experts warn
A study by leading academics on the economic risks around biodiversity loss and deforestation has shown that financial markets covering $83tn in assets could be severely impacted.
Through the design of the world’s first biodiversity-adjusted credit rating model, the research has shown that major risks related to biodiversity loss are being ignored by financial markets.
The research, which covers 23 countries representing 5.5bn people, found that the resulting impact could raise annual interest payments by $162bn and cut global gross domestic product by $2tn.
The work was carried out by a research team from the University of Sheffield, University of Sussex, Edinburgh Business School, and SOAS.
The paper calls on regulators, central banks, and credit rating agencies to incorporate nature- and climate-related financial risks into mainstream risk assessments.
SOAS economists Professor of Economics and Director of the Centre for Sustainable Finance at SOAS Ulrich Volz and Moritz Kraemer, Senior Fellow at the Centre for Sustainable Finance at SOAS were part of the team that helped design the study and contributed to the paper published in Nature.
The researchers’ conservative estimates demonstrate that even a partial collapses in fisheries, wild pollination and tropical timber would cause a global GDP decline of $2 trillion annually. This kind of biodiversity loss would see India’s credit rating falling 4 grades, while China’s would plummet by 5.5 on the 20-point scale. The implications for debt servicing costs are substantial with India having to pay an additional US$49bn a year and US$70bn for China.
Falling credit ratings and higher sovereign risk will sees markets demand higher risk premiums, meaning governments, and ultimately, taxpayers, pay more to borrow. Sovereign ratings assess the ability of countries to repay debt, directly affecting the price governments pay to borrow.
Compared to the UN Global Biodiversity Framework’s target of mobilising US$200bn annually across 196 countries, the study adds to a growing body of evidence that the costs of protecting nature are far lower than the costs of losing it.
The paper calls on regulators, central banks, and credit rating agencies to incorporate nature- and climate-related financial risks into mainstream risk assessments.
The University of Sussex and SOAS are members of ResearchPlus, part of a group research-focused universities forming a new strategic partnership with the primary aim of enhancing the strength of the UK’s research and innovation base.
The report is available to read in full: Biodiversity loss will decrease the future creditworthiness of nations
