Introduction

Biodiversity loss and deforestation are increasingly recognised as systemic economic risks, yet their implications for financial markets remain poorly understood. At least half of global GDP is considered moderately or highly dependent on nature, and partial collapses in just three ecosystem services could result in a decline in global GDP of US$2 trillion annually by 2030 (p.1). Sovereign credit ratings — covering over US$83 trillion of financial assets — currently ignore these risks, meaning markets may be mispricing, mismanaging and misallocating capital (p.1).

A framework for integrating biodiversity loss with credit ratings

The study incorporates forward-looking projections of ecological shocks into sovereign credit assessments. Using the GTAP-InVEST model — combining a global ecosystem service valuation model with a global computable general equilibrium model — the authors analyse three ecosystem services (wild pollination, marine fisheries and tropical timber) across 23 sovereigns representing 5.5 billion people (p.1). Results are presented under a business-as-usual ecosystem service decline scenario (BAU-ES) and a partial ecosystem collapse (PEC) scenario, assuming a 90% reduction in wild pollination services, a 90% reduction in total catch biomass from marine fisheries, and a conversion of 88% of tropical forest into grassland or shrubland (p.3–4).

Impact of biodiversity loss on sovereign credit ratings

Under BAU-ES, Bangladesh experiences a GDP shortfall of 2%, while Angola and the DRC see marginal gains as broader growth outpaces ecosystem losses (p.4). Under PEC, Angola, Bangladesh, the DRC and Madagascar could face GDP losses of more than 15% by 2030 (p.1). Downgrades of at least four notches are expected for Malaysia, China, India and Bangladesh, while the DRC, Angola and Madagascar become effectively unratable (p.4).

The GDP–ratings relationship is highly non-linear; China and Malaysia, with GDP shortfalls of 3.1% and 4.2% respectively, face the greatest rating impacts of 5.5 and 6.3 notches (p.4).

Impact on default probability and borrowing costs

Nature loss increases sovereign default risk. Under PEC, China’s probability of default rises from 2.1% to 6.7% — a threefold increase (p.4). India faces additional annual interest payments of US$49 billion, equivalent to 2.4% of median post-tax income, while China faces US$70 billion (p.1). Across all 23 countries, additional annual interest payments could reach US$162 billion — equivalent to 72.4% of all global overseas development aid in 2023 (p.4–5).

Policy options for meeting additional interest payments

Countries face four options: cut public spending, borrow more, default, or raise taxes. More than 3.3 billion people already live in countries that spend more on interest than on education or health (p.5). The authors note that US$162 billion in additional annual interest nearly reaches the US$200 billion per year conservation target under the Global Biodiversity Framework (p.5).

Discussion

Nature-related financial risks are financially material and can be incorporated into sovereign credit assessments. Credit rating agencies are urged to explicitly include these risks in their methodologies. The paper argues economies face a choice: invest in nature now, or face higher borrowing costs, reduced fiscal space and crowded-out development investment later (p.5).

The future of biodiversity finance

Progress in mobilising biodiversity finance remains slow. The authors call for closer collaboration between environmental scientists, financial institutions and credit rating agencies. A key limitation is that GTAP-InVEST does not support probabilistic statements, and results — covering only three ecosystem services — represent lower-bound estimates (p.6).