A team of economists led by Cambridge University have created the world's first biodiversity-adjusted credit ratings.
Under a business-as-usual scenario, China and Indonesia could see their ratings drop as early as 2030.
More than half of the 26 nations studied face downgrades if parts of the world see a partial collapse of fisheries, tropical timber production and wild pollination.
The annual interest payment on debt would go up by up to US$53 billion a year, leaving many developing nations at significant risk of debt default.
Nature loss degrades everything from human health to farmable soil as risk from biodiversity loss is difficult to quantify.
The creditworthiness of nations is assessed by the Sovereign Ratings. The ratings agencies act as conduits between global capital and the rest of the world.
Moody's and Standard & Poor's assess financial risks but don't take into account the economic consequences of ecological degradation.
Nature-blind investors cannot manage risk effectively, and omitting biodiversity loss from calculations could undermine market stability according to a team of economists.
The lead author said that it wasn't just the financiers that lost out. Increased risk premia means governments pay more to borrow.
It will become harder for countries to service their debt as nature loss reduces economic performance. The consequences of this will be grim.
Today is the day that the report is published.
The loss of flora and fauna carries a hefty economic cost.
The co-author of the study said that the economies reliant on the ecosystems face a choice: pay now by investing in nature or pay later through higher borrowing costs and debt.
Long-term returns are generated by the "pay now" option. There are significant downside risks with the pay later option.
The credit ratings of 26 nations are shown in the latest report by the World Bank.
There is a halt to biodiversity loss as well as a business as usual scenario in which nature declines at current rates.
The team looked at a "tipping point" scenario in which ecosystems suffer partial collapse, which would cause a 90% reduction in services across marine fishing, wild pollination, and provision of timber from tropical regions.
Current trends show that India, Bangladesh, China and Indonesia will have their credit ratings lowered in eight years.
More than half of the study's countries will fall at least one notch if the struggling ecosystems begin to collapse.
An already indebted corporate sector incurs an extra 20 to 30 billion of debt as a result of China's credit rating falling. Up to $2.6 billion in additional interest payments is made annually in Malaysia.
India, Bangladesh and Indonesia, along with billions in interest, and 12 other countries of the study increase their risk of bankruptcy by more than 10%, most dramatically for Bangladesh, Ethiopia and India.
Pakistan is one of six countries that would become more likely than not to default if the natural environment collapses.
The co-author of the study said that the loss of nature will push developing countries closer to the edge.
There is a need for innovation in the debt market. Priorities include using debt markets to support conservativism and incorporating science into risk assessments.
According to the researchers, countries that protect biological assets could see their credit ratings improve.
The laws of demand and supply are applicable here as well. According to the co-author, Diminished supply elsewhere will increase the scarcity of natural assets.
He said that incorporating nature risk into credit ratings would encourage governments to protect the environment.
The co-author said that biodiversity-related risks are a material risk to economic activity. Ensuring macroeconomic stability is important for protecting the natural habitat.
Ecologists understand diversity loss. Changes in land use can be tracked by satellite. It is inevitable that nature will be included into the ratings.
The research team was the first to suggest that global warming would cause credit ratings to be lowered.
Climate change has dominated the discussion, but demonstrating how biodiversity risk can translate into market risk is the greatest challenge. Simon Zadek is the Chair of the Finance for Biodiversity Initiative.
More information: Nature Loss and Sovereign Credit Ratings, www.bennettinstitute.cam.ac.uk … eign-credit-ratings/
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