Nature loss and sovereign credit ratings

Agarwala, Matthew / Matt Burke / Patrycja Klusak / Moritz Kraemer / Ulrich Volz
External Publications (2022)

London et al.: Finance for Biodiversity Initiative / SOAS Centre for Sustainable Finance / Bennett Institute for Public Policy at the University of Cambridge / University of East Anglia / Sheffield Hallam University

DOI: https://doi.org/10.25501/SOAS.00037559
Open access

Biodiversity loss, decline of ecosystem services, and overall environmental degradation can hit economies through multiple channels. The combined macroeconomic consequences can impact sovereign creditworthiness. Yet, the methodologies published and applied by leading credit rating agencies (CRAs) do not explicitly incorporate biodiversity and nature-related risks. Omitting them may ultimately undermine market stability. As environmental pressures intensify, the gap between the information conveyed by ratings and real-world risk exposure may grow. A consistent approach to integrating nature- and biodiversity- related risks into debt markets is long overdue. This report models the effect of nature loss on credit ratings, default probabilities, and the cost of borrowing. The results have implications for stakeholders including credit rating agencies, investors, and sovereigns themselves.

About the author

Volz, Ulrich

Economist