London, 12 November, 2012–Consideration of environmental risks and natural resource constraints is becoming increasingly important in assessing a nation’s credit risk, according to a new report by the UN Environment Programme Finance Initiative (UNEP FI) and Global Footprint Network, in collaboration with leading financial institutions. On November 19, the key findings of the E-RISC: A New Angle on Sovereign Credit Risk report will be unveiled at an interactive event hosted by Bloomberg in London.
Bloomberg will also now be offering Global Footprint Network’s country-level natural resource risk data (National Footprint Accounts) on all its terminals. The data will help users integrate natural resource risk into sovereign debt, economic growth and company valuation models.
To date, tightening constraints on resources and their impacts on national economies have been largely absent from financial analyses. The E-RISC report fills this gap by exploring to what extent resource risks can impact a nation’s economy, what factors can drive and hamper economic health in the short, medium and long term, and how these affects a nation’s ability to pay its debts. The E-RISC work deepens understanding of investment risk, by providing insight into how environmental criteria can be factored into sovereign credit risk models and hence in the selection and weighting of sovereign bonds as well as sovereign credit ratings.
“The time has come for a better understanding of the connection between environmental and natural resource risk and sovereign credit risk—only then will investors, credit rating agencies and governments be able to plan over the medium to long term with the kind of insight aimed at ensuring long-term economic health and stability,” said Susan Burns, Founder and Senior Vice President of Global Footprint Network.
The E-RISC report includes an analysis of five nations’ natural resource-related risks over short-, medium- and long-term risk horizons, providing a simple framework to compare and rank countries. Two options are discussed for embedding these risks into conventional sovereign credit risk models.
Among the report’s findings:
- Natural resource constraints are financially material for nations. The mechanisms include price volatility, loss of income due to environmental degradation and potential costs due to future climate change policies.
- Countries that depend heavily on natural resources and services from other regions may find that their resource supply becomes unreliable or costly, and this has economic implications. For example, a 2 10 per cent variation in commodity prices can lead to changes in a country’s trade balance equivalent to over 0.5 per cent of GDP.
- Analysis of 5 countries (Brazil, Japan, France, Turkey and India) reveals that countries with similar credit ratings from the three major credit rating agencies have very different environmental risk profiles.
- Risks due to environmental degradation are also significant for the five countries considered (Brazil, Japan, France, Turkey and India). A 10 per cent reduction in the productive capacity of soils and freshwater areas alone could lead to a reduction in trade balance equivalent to over 4 per cent of GDP.
- Environmental risks are therefore potentially of a large enough magnitude to affect countries’ economies in ways that could influence their willingness or ability to repay sovereign debt.
The London event is expected to draw hundreds of representatives from leading financial institutions. Keynote speakers include Erik-Jan van Bergen (Chief Investment Officer, SNS Asset Management) and Pavan Sukhdev (study leader of TEEB and author of Corporation 2020). Other speakers and workshop participants will include credit rating representatives, asset managers and information providers. Journalists are invited to attend the pre-event Press Conferences at 11:45. See full agenda here.
For further information, please see the Environmental Risk in Sovereign Credits website or contact:
Ivo Mulder, Programme Officer, UNEP Finance Initiative, Ivo.mulder [at] unep.org.
Ryan Van Lenning, Communications Coordinator, Global Footprint Network, 510-839-8879, ryan.vanlenning [at] footprintnetwork.org.
About the United Nations Environment Programme Finance Initiative (UNEP FI)
UNEP FI is a unique global partnership between the United Nations Environment Programme (UNEP) and the global financial sector. UNEP FI works closely with nearly 200 financial institutions who are Signatories to the UNEP FI Statements, and a range of partner organisations to develop and promote linkages between sustainability and financial performance. Through peer-to-peer networks, research and training, UNEP FI carries out its mission to identify, promote, and realise the adoption of best environmental and sustainability practice at all levels of financial institution operations. www.unepfi.org
About Global Footprint Network
Global Footprint Network is an international research organization working to advance sustainability through the Ecological Footprint, a resource management tool that measures how much nature we have, how much we use and who uses what. Global Footprint Network coordinates research, develops methodological standards, and releases annual data on the Ecological Footprint and biocapacity of more than 150 countries and humanity as a whole. By providing robust resource accounts to track supply of and demand on ecological assets, Global Footprint Network gives decision-makers the data they need to succeed in a world facing tightening resource constraints. www.footprintnetwork.org