Biodiversity loss will decrease the future creditworthiness of nations.

Area of Science:

• Environmental Economics
• Financial Risk Assessment
• Biodiversity Conservation

Background:

• Biodiversity loss and deforestation are systemic economic risks with poorly understood financial market implications.
• Sovereign debt, the world's largest asset class, is vulnerable to environmental degradation undermining economic activity and government debt servicing capacity.
• Current sovereign credit ratings fail to incorporate biodiversity risks, leading to potential mispricing and misallocation of US$83 trillion in financial assets.

Purpose of the Study:

• To assess the impact of biodiversity and ecosystem service loss on sovereign debt financial risk.
• To integrate biodiversity risk into sovereign credit assessments using an extended S&P Global methodology.
• To quantify the financial implications of ecosystem collapse scenarios for 23 countries.

Main Methods:

• Extended S&P Global's credit rating methodology to include biodiversity risk.
• Incorporated scenarios for future tropical timber, wild pollination, and marine fisheries services.
• Analyzed 23 countries representing 5.5 billion people.

Main Results:

• A partial ecosystem collapse scenario could increase annual debt servicing costs by US$49 billion in India and US$70 billion in China.
• Additional annual interest payments across countries could reach US$162 billion, nearing the Global Biodiversity Framework's conservation target.
• Angola, Bangladesh, the Democratic Republic of the Congo, and Madagascar could experience GDP losses exceeding 15% by 2030.

Conclusions:

• Financial markets are systematically underpricing nature-related risks.
• Failure to account for biodiversity loss has significant consequences for public finances, ecosystems, and financial stability.
• Integrating biodiversity risk into credit assessments is crucial for accurate financial risk management and market stability.