The Financial Risks of Ecological Limits
Some of the economic implications of resource constraints were introduced to the world of international finance this week in London, when Global Footprint Network and the UN Environment Programme Finance Initiative (UNEP FI), in collaboration with leading financial institutions, launched the E-RISC (Environmental Risk Integration in Sovereign Credit) report at Bloomberg, a leader in global financial data.
The interactive event drew over 150 participants, including representatives from leading financial institutions, investors, asset management firms and rating agencies, including Caisse des Depots, SNS Asset Management, Standard & Poor’s, J.P. Morgan, KfW Bankengruppe, Deutsche Bank, HSBC and Barclays.
To date, tightening resource constraints 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 and ecological risks can impact a nation’s economy and how these factors affect a nation’s ability to pay its debts.
The E-RISC project analyzes five nations’ (Brazil, Japan, France, Turkey and India) natural resource-related risks over short-, medium- and long-term risk horizons, providing a simple framework to compare and rank countries. Despite having similar ratings from the three major credit rating agencies, the five nations have very different environmental risk profiles.
BusinessWeek and Financial News covered the E-RISC project and some of its key findings. For example, nations that are heavily dependent on natural resource imports may find that continued supply becomes unreliable or costly. For example, a 10 percent variation in commodity prices can lead to changes in a country’s trade balance equivalent to 0.5 percent of GDP. Further, 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.
Also yesterday, Bloomberg announced that it will now be offering Global Footprint Network’s country-level natural resource risk data (National Footprint Accounts) on all its terminals. This means that Bloomberg’s 300,000 global subscribers will have access to data that will help them integrate natural resource risk into sovereign debt, economic growth and company valuation models. The availability of Footprint data on the Bloomberg terminals is significant, as it marks a further step towards integrating—rather than externalizing—the ecological assets on which economies rely upon. Global Footprint Network will be the only provider to cover comprehensive natural resource risk data on the Bloomberg terminal.
The E-RISC and Bloomberg news came only days after Global Footprint Network won more honors for its Footprint work. The Binding Prize—one of Europe’s top environmental awards—was awarded to Global Footprint Network President Mathis Wackernagel. Previous winners include the International Commission for the Protection of the Alps (CIPRA), Slow Food International, and the European Greenbelt (Grüne Band Europa). The honor comes on the heels of Dr. Wackernagel formally receiving the Blue Planet Prize at a ceremony in Japan at the end of October.
The Binding Prize has been given every year since 1986 in Liechtenstein to people chosen for their advancement of ideas in the field of nature conservation and environmental protection. Binding Foundation board member Martin Boesch, who presented the award in Vaduz on November 9, said that the Ecological Footprint concept not only helps to promote global sustainability, “but also had a dramatic and widespread media influence, eliciting environmental policy decisions.”
“Climate change is not the problem. Erosion, water scarcity, desertification and overfishing are also not. These are all just symptoms of a dominant theme: We are demanding more than the Earth can sustainably provide,” Wackernagel said in his acceptance speech. “Together with the leaders of these countries [referring to the 10+ nations that have adopted or reviewed Ecological Footprint accounting] we want to find out what this means for the future. Can the trends be turned in the right direction?”
Press conference photo credit: Xinhua News Agency