Study warns biodiversity loss could trigger wave of debt crises

By Marc Jones

LONDON, June 5 (Reuters) - Financial ‌markets are underestimating the ​economic risks ​of biodiversity loss, potentially exposing countries to sovereign debt crises and sharply higher borrowing costs, according to research published on Friday.

The study, led by economists from the Universities of Sussex, ‌Sheffield and Heriot-Watt, presented what they described as the world’s first biodiversity-adjusted sovereign credit ratings ⁠model.

It said existing ratings frameworks fail to incorporate environmental degradation, leaving some $83 trillion of global assets vulnerable to mispricing.

Using an adjusted version ‌of S&P Global’s ratings methodology, the ‌researchers estimated that even a partial collapse of key ecosystems – including wild pollinators, marine fisheries and tropical forests – could increase annual global sovereign debt interest payments by $162 billion.

"Financial markets are effectively blind to nature-related risks," ​said the University of Sussex's Matthew Agarwala. "As biodiversity loss undermines economic performance, it becomes harder for countries to service their debt, raising borrowing costs and fiscal strain."

Ecosystems underpin the global economy through "ecosystem services" like ⁠crop pollination and seafood production. Partial disruption to these could cut global GDP by around $2 trillion per year.

The effects on vulnerable nations' creditworthiness could ​be severe. India’s sovereign rating could fall by four notches under such a scenario, while China’s could drop by more than five on a 20-point scale, the research ​found.

As lower credit ratings typically force governments to pay higher risk ‌premiums on debt, the result could add roughly $50 billion to India's annual debt interest bill and $70 billion to China's.

OVERLOOKED RISKS

Sovereign downgrades could ripple across domestic economies, affecting businesses, ⁠financial institutions and pension funds, the study found.

Pati Klusak of Edinburgh Business School said the findings echo past financial crises.

"The 2008 global financial crisis showed what happens when markets ignore emerging threats," she said. "We risk repeating that mistake if ecological risks ⁠remain excluded from credit assessments."

The research also said the likes of Indonesia, Bangladesh and Malaysia could face rating downgrades of four ​to six notches.

Across the 23 countries studied, home to 5.5 billion people, biodiversity-linked downgrades could push many closer to sovereign default.

The additional debt servicing costs would represent almost three-quarters of global annual overseas development aid and a large chunk of the ‌UN Global Biodiversity Framework’s target of mobilising $200 billion annually across 196 countries.

The authors urged regulators, central banks and rating agencies to integrate nature-related risks into financial models, saying ‌the cost of protecting biodiversity is far lower than the economic consequences of its loss.

Moritz Kraemer, a former sovereign analyst ⁠at S&P Global who worked on the ‌study, said rating agencies in particular ​were failing.

"By the time these bonds mature in 30 years or even 50 years they could be 3-4 notches lower," Kraemer said. "That is a problem."

(Reporting by Marc Jones; Editing by ‌Hugh Lawson)

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