CAMBRIDGE, United Kingdom — Ecological destruction is pushing certain nations towards economic bankruptcy, a new report says.
The world’s first biodiversity-adjusted sovereign credit ratings show the destruction of nature is driving downgrades in countries’ credit ratings, debt crises, and soaring borrowing costs. Researchers from the University of Cambridge add that going bankrupt and defaulting on debt would mean governments having to raise taxes, cut spending, or increase inflation — all of which would hurt ordinary workers the most.
The problem is particularly acute in low and middle-income countries. The economists say governments should pay up to preserve nature now rather than waiting and facing far higher costs later.
If parts of the world see a “partial ecosystems collapse” of fisheries, tropical timber production, and wild pollination – as simulated by the World Bank – then more than half of the 26 nations the team studied could face credit downgrades.
Across the 26 countries, the downgrades would increase the annual interest payment on debt by up to $53 billion a year. This would in effect bankrupt many countries because they would have to default on their debt.
The researchers say their AI-based forecast is actually a cautious prediction because it only covers fisheries, timber, and pollinators — adding that the true toll could be far higher. Sovereign ratings assess the credit worthiness of nations, covering more than $66 trillion in sovereign debt.
‘Nature blindness’ could sink financial markets
Currently, agencies like Moody’s and Standard & Poor’s assess difficult-to-quantify financial risks such as possible geopolitical events, but largely ignore the economic consequences of ecological disasters. Study authors say “nature-blind” investors cannot manage risk effectively. They also claim that omitting biodiversity losses from these financial calculations could “undermine market stability.”
“It is not just the financiers that lose out,” says lead study author Dr. Matthew Agarwala in a university release. “Increased sovereign risk sees markets demand higher risk premia, meaning governments – and, ultimately, tax payers – pay more to borrow.”
“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 increase inflation. This will have grim consequences for ordinary people.”
The researchers say ecosystems keep economies moving, from bees that pollinate crops to plants that prevent flooding.
“Economies reliant on ecosystems face a choice: pay now, by investing in nature, or pay later through higher borrowing costs and spiraling debt,” says study co-author Dr. Matt Burke, senior lecturer at Sheffield Hallam University. “The ‘pay now’ option generates long-term returns for people, business and nature. The ‘pay later’ option has significant downside risks, with little or no upside.”
What would an ecological tipping point do to the economy?
For the study, the team modeled the credit ratings of 26 countries across three different scenarios, building on World Bank research published last year.
The first scenario involved a halt to biodiversity loss, while another imagined what would happen if businesses carried on as usual. The team also looked at a “tipping point” scenario where ecosystems suffer a partial collapse. This would lead to a 90-percent reduction in services across marine fishing, wild pollination, and the provision of timber from tropical regions — where the loss of forests would be most severe.
Even without tipping points, the study found current trends alone point to four nations facing downgraded credit ratings in the next eight years. India and Bangladesh are set to fall by one notch, while China and Indonesia could fall by two notches — along a 20-notch scale.
If the struggling ecosystems in the analysis actually start to collapse, researchers say more than half of the studied countries could drop at least one notch, with one-third falling by three or more notches.
China’s credit rating falls by six notches, creating added annual interest payments of up to $18 billion, while an already indebted corporate sector would incur an extra $20 to $30 billion in debt. In these scenarios, Malaysia falls by almost seven notches, with up to $2.6 billion in additional interest payments every year.
Half the study would be facing bankruptcy
Downgrades of four notches would hit India, Bangladesh, and Indonesia, along with billions in interest. Another 12 countries in the study would see their risk of bankruptcy increase by more than 10 percent; most dramatically in Bangladesh (41%), Ethiopia (38%), and India (29%). Six countries in the study, including Pakistan and Madagascar, would become more likely than not to default if hit by a sudden collapse of natural ecosystems.
“Developing countries are already saddled with crippling debt burdens driven by Covid-19 and soaring prices, and loss of nature will push these nations closer to the edge,” says co-author Dr Patrycja Klusak, affiliated researcher at Cambridge’s Bennett Institute and an associate professor at the University of East Anglia.
“There is an urgent need for innovation in sovereign debt markets. Priorities include incorporating science into forward-looking risk assessments, immediate support for developing countries to avoid sovereign defaults, and using debt markets to support conservation investments.”
If countries protect nature, they could see their credit worthiness go up
“Incorporating nature risk into sovereign credit ratings would create a strong incentive for governments to enhance environmental protection,” says study co-author Dr. Moritz Kraemer from SOAS University London.
“Biodiversity-related risks are a material risk to economic activity and public finances. Protecting the natural habitat is not just important for nature’s sake but also crucial for safeguarding macroeconomic stability,” adds study co-author Professor Ulrich Volz, also from SOAS. “Biodiversity loss is well understood by ecologists. Satellite surveillance means land-use changes can be tracked, and loss of nature quantified. Given the size of the economic risks, the inclusion of nature into sovereign credit ratings is inevitable.”
“Climate change has dominated the conversation, but demonstrating how biodiversity risk translates into market risk is the new frontier of environmental finance, and currently the greatest challenge. This first-of-its-kind study begins that quest for 26 countries,” concludes Simon Zadek, chair of the Finance for Biodiversity Initiative, which supported the research.
South West News Service writer Gwyn Wright contributed to this report.