There is little or no impact from the aftermath of financial losses on biodiversity loss. This leaves many countries at increased risk of defaulting in to debt which can have a dire impact on the lifestyles and life chances of the general public as a whole. That’s according to new research published in Nature who found that the main factors causing serious financial risk included environmental degradation which is more than often identified as serious a risk meaning that sovereign debt markets have no way of accounting for the change in financial circumstances, this will have on the general public or on the market as a whole.
Adjusting S&P Global’s credit ratings to account for ecological damage, a team of economists led by the Universities of Sussex, Sheffield, and Heriot-Watt found that even a partial collapse for wild pollinators, marine fisheries, and tropical forests could add US$162bn to the annual interest payment on sovereign debt. There are many environments which cater for what economists call ecosystem services. This means that they have as much of an impact on the environment as insects pollinating crops and oceans underpinning the seafood value chain. There would be a callosal impact if these services were lost This kind of biodiversity loss would see India’s credit rating falling four grades where as China’s would plummet by 5.5 on the 20-point scale.
The researchers warn that falling credit ratings and higher sovereign risk sees markets demand higher risk premia, meaning governments, and ultimately, taxpayers, pay more to borrow.
Professor Matthew Agarwala, of the University of Sussex’s Bennett Institute for Innovation and Policy Acceleration said: “It’s not just financiers who will lose out. As nature loss reduces economic performance, it will become harder for countries to service their debt, straining government budgets and forcing them to raise taxes, cut spending, or push inflation even higher. The consequences could be grim. Governments face a stark choice – pay now, by investing in nature recovery, or pay later through higher borrowing costs.”
Sovereign ratings decide on the ability of countries to repay debt, directly affecting the price governments pay to borrow. This in turn affects taxpayers: 11 pence of every pound of tax collected in the UK goes to paying interest on the national debt. That’s more than is spent on Education (10.3%), Defence (5.5%), Public Order and Safety (4.4%) or the Environment (1.5%). This can also affect the cost of borrowing elsewhere meaning that there can be implications for businesses and other economic institutions.
Professor Pati Klusak, from the Edinburgh Business School said: “The 2008 global financial crisis was an example of what happens when markets and ratings agencies ignore new risks. By integrating ecological science with credit ratings models, our work reveals that the financial system risks once again sleepwalking into a catastrophe.”
Dr. Matt Burke, of the Sheffield University Management School explains: “Environmental scientists and financial markets need to get better at talking to each other. Biodiversity finance is becoming a bit of a buzzword, but most of the research being published on this ignores the underlying science, the pace of nature loss, and the consequences for people and livelihoods.”
The 23 countries captured in the study represent 5.5 billion people. Biodiversity-driven downgrades in these countries would increase annual debt interest payments by over US$162 billion a year, equivalent to nearly three-quarters global overseas development aid, and leaving many nations at risk of sovereign debt default – in effect, bankruptcy.
Arend Kulenkampff, Innovative Finance Lead, Nature Finance said: “Protecting nature costs far less than losing it. Yet this simple truth rarely reaches the financial decisions that determine its fate. For sovereigns facing debt distress, the stakes are existential: stripping forests, grasslands, and watersheds to service today’s debt destroys the very foundations of future solvency. This research exists to make that cost visible before it is too late.”
The work was carried out by a research team spanning the University of Sussex, University of Sheffield, Edinburgh Business School, and SOAS.
