Loss of nature could have a devastating effect on public finances, study shows
The loss of plant and animal species around the world could have a devastating effect on public finances, a new study claims.
Researchers say ecological destruction is pushing many developing nations towards bankruptcy by driving downgrades in countries’ credit ratings, debt crises and soaring borrowing costs.
This is because nature and biodiversity keep economies ticking over – from bees that pollinate crops to plants that prevent flooding – and their loss carries hefty economic costs.
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, according to a team of economists led by Cambridge University.
They say governments should pay up to preserve nature now, rather than waiting and facing far higher costs later.
Warning: The loss of nature across the world could have a devastating effect on public finances, a new study claims. Pictured is an area of deforestation in the Colombian Amazon
Researchers say ecological destruction is pushing nations towards bankruptcy by driving downgrades in countries’ credit ratings, debt crises and soaring borrowing costs. The graphic above shows the percentage of GDP change of selected countries in a partial nature collapse scenario as opposed to ‘business-as-usual’
This graphic shows how countries’ credit ratings would change in a partial nature collapse scenario, as opposed to business-as-usual
LIVING PLANET INDEX: SPECIES WINNERS AND LOSERS
Species in decline:
- The Irrawady dolphin has declined by roughly 44 per cent between 1997 and 2008.
- The grey partridge has declined by 85 per cent between 1970 and 2004 in the UK.
- The Arctic skua, in the Orkney Islands, experienced a decline of 62 per cent from 1982 and 2010.
- Population numbers of Grauer’s Gorilla in the Kahuzi-Biega National Park, DRC have seen an estimated 87 per cent decline between 1994 and 2015.
- African elephant populations in the Selous-Mikumi ecosystem in Tanzania have declined by 86 per cent since 1976.
- African elephants declined by 98 per cent between 1985 and 2010 due to the increasing of poaching in the early 1980s.
- Populations of the Forest Elephant in Ghana has declined by approximately 60 per cent.
- Leatherback turtles have seen a declined by 84 per cent in Tortuguero beach in Costa Rica.
Species on the increase:
- Between 2008-2014, the tiger population of Nepal has increased by 64 per cent due to conservation efforts.
- Populations of the loggerhead turtle have increased by 154 per cent in the iSimangaliso Wetland Park of South Africa between 1973 and 2009.
- The blacktail reef shark increased in relative abundance by over 360 per cent between 2004 and 2016.
- The leopard shark population of North America increased by nearly 750 per cent from 1995-2004 after the ban of a gill net fishery.
SOURCE: WWF LPI
The world’s first biodiversity-adjusted sovereign credit ratings have been published in a new report by researchers from the universities of Cambridge, East Anglia, Sheffield Hallam and SOAS University of London.
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 the 26 nations covered in the study face downgrades.
Across the 26 countries, the downgrades would increase the annual interest payment on debt by up to £43 billion ($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 cautious because it only covers fisheries, timber and pollinators, while in reality nature loss degrades everything from human health to farmable soil, so the true toll could be far higher.
Sovereign ratings assess the creditworthiness of nations, covering more than £53.9 trillion ($66 trillion) in sovereign debt.
Currently, agencies such as 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 degradation.
The research team said ‘nature-blind’ investors cannot manage risk effectively.
They claim omitting biodiversity loss from calculations could ‘undermine market stability’.
Lead author Dr Matthew Agarwala, of the University of Cambridge, said: ‘It is not just the financiers that lose out.
‘Increased sovereign risk sees markets demand higher risk premia, meaning governments – and, ultimately, taxpayers – 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.’
Study co-author Dr Matt Burke added: ‘Economies reliant on ecosystems face a choice: pay now, by investing in nature, or pay later through higher borrowing costs and spiralling debt.
‘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.’
For the study, the team modelled the credit ratings of 26 countries across three different scenarios, building on World Bank research published last year.
The problem is particularly acute in low and middle income countries, according to a team of economists led by Cambridge University. This graphic shows the probability of countries defaulting based on current 2020 values vs a partial nature collapse scenario
The population picture for land-based insects varies around the world – with some parts of the globe seeing an increase and others a dramatic decline including parts of North America
Using the data from 20,811 populations of 4,392 species, the 2020 global Living Planet Index showed an average 68 per cent decline in monitored populations between 1970 and 2016
The first scenario involved a halt to biodiversity loss while another imagined what would happen if business carried on as usual.
The team also looked at a ‘tipping point’ scenario where ecosystems suffer partial collapse, creating a 90 per cent reduction in services across marine fishing, wild pollination, and provision of timber from tropical regions, where loss of natural forest is most acute.
Even without tipping points, current trends alone suggest that four nations face downgraded credit ratings in the next eight years.
India and Bangladesh are set to fall by one notch, and China and Indonesia by two notches on a 20 notch scale.
If the struggling ecosystems in the analysis actually start to collapse, more than half the study’s countries drop at least one notch, with a third falling by three or more notches.
China’s credit rating falls by six notches, creating added annual interest payments of up to £14.7 billion ($18 billion) while an already indebted corporate sector incurs an extra £16-24 billion ($20-30 billion) of debt.
Malaysia falls by almost seven notches, with up to £2.1 billion ($2.6 billion) in additional interest payments every year.
Downgrades of four notches would hit India, Bangladesh and Indonesia, along with billions in interest, and 12 countries of the 26 in the study increase their risk of bankruptcy by more than 10 per cent, most dramatically for Bangladesh (41 per cent), Ethiopia (38 per cent) and India (29 per cent).
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.
This image by the WWF shows an area of illegal deforestation in the in the indigenous Uru-Eu-Wau-Wau territory in Rondonia. The charity has said that intensive agriculture, deforestation and the conversion of wild spaces into farmland are among the main causes of nature loss
Study co-author Dr Patrycja Klusak, of the University of East Anglia, said: ‘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.
‘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.’
The team added that if countries protect nature they could see their creditworthiness go up.
Co-author Dr Moritz Kraemer, of SOAS University London, said: ‘Incorporating nature risk into sovereign credit ratings would create a strong incentive for governments to enhance environmental protection.’
Study co-author Professor Ulrich Volz, also from SOAS, added: ‘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.
‘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.’
EXTINCTION LOOMS FOR MORE THAN ONE MILLION SPECIES
Nature is in more trouble now than at any time in human history with extinction looming over one million species of plants and animals, experts say.
That’s the key finding of the United Nations‘ (UN) first comprehensive report on biodiversity – the variety of plant and animal life in the world or in a particular habitat.
The report – published on May 6, 2019 – says species are being lost at a rate tens or hundreds of times faster than in the past.
Many of the worst effects can be prevented by changing the way we grow food, produce energy, deal with climate change and dispose of waste, the report said.
The report’s 39-page summary highlighted five ways people are reducing biodiversity:
– Turning forests, grasslands and other areas into farms, cities and other developments. The habitat loss leaves plants and animals homeless. About three-quarters of Earth’s land, two-thirds of its oceans and 85% of crucial wetlands have been severely altered or lost, making it harder for species to survive, the report said.
– Overfishing the world’s oceans. A third of the world’s fish stocks are overfished.
– Permitting climate change from the burning of fossil fuels to make it too hot, wet or dry for some species to survive. Almost half of the world’s land mammals – not including bats – and nearly a quarter of the birds have already had their habitats hit hard by global warming.
– Polluting land and water. Every year, 300 to 400 million tons of heavy metals, solvents and toxic sludge are dumped into the world’s waters.
– Allowing invasive species to crowd out native plants and animals. The number of invasive alien species per country has risen 70 per cent since 1970, with one species of bacteria threatening nearly 400 amphibian species.
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