Experts Warn Biodiversity Loss can Trigger Sovereign Debt Crises; India's Credit Rating May Fall

Biodiversity loss would see India’s credit rating falling 4 grades on a 20-point scale and incur an additional USD 49 billion a year in debt servicing costs, experts have warned in a new study.

Pointing out that biodiverse environments provide valuable economic contributions like insects pollinating crops and oceans underpinning the seafood value chain -- what economists call “ecosystem services” -- the study said losing these services carries hefty costs.

Sovereign ratings assess the ability of countries to repay debt, directly affecting the price governments pay to borrow; it, in turn, affects taxpayers.

“The researchers’ conservative estimates demonstrate that even partial collapses in fisheries, wild pollination and tropical timber would cause a global GDP decline of USD 2 trillion annually,” the study published in 'Nature' has said.

“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 USD 49 billion a year and USD 70 billion for China,” said the study.

While environmental degradation is recognised as a serious financial risk, sovereign debt markets currently have no way of accounting for it, leaving USD 83 trillion of assets open to mispricing, it said.

The work for the study was carried out by a research team spanning the University of Sheffield, University of Sussex, Edinburgh Business School, and SOAS University of London, a release from the University of Sheffield said on Thursday.

A team of economists from the Universities of Sheffield, Sussex, and Heriot-Watt developed the world's first biodiversity-adjusted credit ratings model, finding that even a partial collapse of wild pollinators, marine fisheries, and tropical forests could add USD 162 billion to the annual interest payment on sovereign debt, the release said.

The researchers warned that falling credit ratings and higher sovereign risk will see markets demand higher risk premia, meaning governments, and ultimately, taxpayers, pay more to borrow.

Angola, Bangladesh, the Democratic Republic of the Congo and Madagascar could face gross domestic product losses of more than 15% by 2030, the study said and warned: “Our results suggest that financial markets are systematically underpricing nature-related risks, with consequences for public finances, nature and financial stability.” 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’s 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’s recovery, or pay later through higher borrowing costs,” he added.

For the past five years, the research team has been developing machine learning techniques to incorporate environmental science into credit risk assessments. “The results show that Indonesia, Bangladesh, India, China, and Malaysia could all face downgrades of four to six grades under a partial collapse scenario,” the release said.

If the additional debt servicing costs were met through new taxation, they would absorb about 1.8% of after-tax income for the median Indonesian, rising to 2.3% in Malaysia and 2.5% in India, the researchers said.

Dr Matt Burke, of the Sheffield University Management School, said, “Environmental scientists and financial markets need to get better at talking to each other.” The Nature paper called on regulators, central banks, and credit rating agencies to incorporate nature- and climate-related financial risks into mainstream risk assessments.

Arend Kulenkampff, Innovative Finance Lead, NatureFinance said: “Protecting nature costs far less than losing it. Yet this simple truth rarely reaches the financial decisions that determine its fate.” As many as 23 countries representing 5.5 billion people were captured in the study. sus