Low-and middle-income (LMI) countries harbour a significant portion of the world’s biodiversity and are home to unique and endemic species. At the same time, these countries suffer from high levels of public debt and face restricted access to international debt markets.
As shown through the set of biodiversity-loss-adjusted sovereign ratings developed by the AIIB (Asian Infrastructure Investment Bank), the impact of nature and biodiversity loss (e.g. leading to the collapse of marine fisheries and wild pollination) has significantly negative consequences on issuer GDP and credit ratings.
Twin climate and biodiversity crises pose both immediate and long-term risks to countries’ economies, citizens and investors. LMI countries face further deterioration of their credit ratings, economies, livelihood opportunities and biodiversity. S&P Global has warned of a “poverty trap” for low-income countries hit by climate change. Partly, because having to invest in disaster relief and recovery means there are fewer funds to make existing infrastructure more resilient.
Physical climate risks add to sovereign debt risk and costs, further eroding fiscal space to invest in resilience, carbon neutrality and nature conservation.
Sustainability-linked sovereign debt is one important example of an innovative financial approach which can address the triple challenge of public debt distress, climate shocks and nature degradation.
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