How biodiversity loss could bankrupt some countries
The growing threat to the planet’s biodiversity, on which life on earth depends, is well documented. It is declining faster than at any other time in history, with serious implications for human health and prosperity.
About one million animal and plant species are threatened with extinction, according to the UN. It indicates that human activity has altered nearly two-thirds of the earth’s surface. This puts enormous pressure on nature and increases the risk of zoonotic diseases such as COVID-19 as humans come into increased contact with wildlife.
Research by the Royal Society Scientific Journal also indicates that climate change is expected to become one of the main drivers of biodiversity loss by the second half of this century. Rising temperatures and changing rainfall patterns could match or even exceed the effects of deforestation and agriculture.
However, the loss of biodiversity can have an impact on the economy, according to a new report from the University of Cambridge. A team of economists has established what it says are the world’s first biodiversity-adjusted sovereign credit ratings. These show how ecological destruction can lead to credit rating downgrades and spiraling borrowing costs. The report says the degradation of “ecosystem services” provided by nature – such as bees pollinating crops and plants that regenerate soil and prevent flooding – can create huge economic costs.
A new era for the sovereign rating system?
A sovereign rating is an independent assessment of the creditworthiness of a country or sovereign entity. It allows investors to check the level of risk associated with investing in the debt (government bonds) of the nation in question.
While the agencies behind these ratings are prepared to assess risks such as potential geopolitical events, they focus less on the financial fallout from environmental degradation, according to the authors of the new report. They argue that to effectively manage risk and maintain market stability, biodiversity loss must factor into the calculations.
If some parts of the world see a “partial ecosystem collapse” of fishing, tropical timber production and wild pollination… then more than half of the 26 countries studied would face downgrades.
“As the loss of nature reduces economic performance, it will become more difficult for countries to service their debt, which will strain government budgets and force them to raise taxes, cut spending or increase inflation. This will have serious consequences for ordinary people,” the lead author said. Matthew Agarwala, from the Bennett Institute for Public Policy at the University of Cambridge.
Many countries could face a credit crunch amid biodiversity loss
The report is based on a study published by the World Bank last year, examining the credit ratings of 26 countries through different scenarios: “one stop in biodiversity loss”, as well as what he calls a “business as usual” scenario, where ecosystems degrade at current pace. This includes the global loss of 114 million acres of wilderness by 2030.
The researchers also studied a “tipping point” scenario, where ecosystems experience partial collapse. This has been measured by a 90% reduction in marine fishing, wild pollination and tropical timber supply.
“If some parts of the world see a ‘partial ecosystem collapse’ of fisheries, tropical timber production and wild pollination…then more than half of the 26 countries studied would face downgrades,” the researchers said. researchers. “In the 26 countries, these downgrades increase annual debt interest payments to $53 billion per yearleaving many developing countries at significant risk of sovereign debt default – in effect, bankruptcy.”
Nearly half of the 26 countries studied would increase their risk of bankruptcy by more than 10% in the scenario.
Saving nature could save money
The researchers say that by better protecting their natural assets, countries could see their creditworthiness improve. “Biodiversity-related risks pose a significant risk to economic activity and public finances. Protecting natural habitat is not only important for the good of nature, but also crucial for safeguarding stability. macroeconomics,” said co-author Ulrich Volz.
The research team said it was the first to produce “climate-smart” sovereign credit ratings, which predict climate change-related downgrades as early as 2030. They conclude that due to the potential scale of increasing economic risks, the inclusion of biodiversity in ratings is inevitable.
The World Economic Forum Nature Action Program aims to promote systematic solutions and transitions that will create a “positive for nature” economy through public-private collaboration. Partners such as Unilever, Walmart and Gucci have already made ambitious commitments to address biodiversity loss in their business operations.
The commercial value of better protecting the natural environment is obvious. The Forum’s The Future of Nature Business 2020 report estimated that the transition to nature-friendly business models in key sectors could generate nearly 400 million jobs and over $10 trillion in annual trade value by 2030.