
Climate & nature sovereign index: Introducing a framework for a clear assessment of environmental risk
The Climate and Nature Sovereign Index (CNSI) is a framework assessing climate and nature-related risks at a country level. It utilises real-time and forward-looking indicators to help sovereign debt investors evaluate environmental risks and engage with countries on sustainable policies, aiming to integrate environmental considerations into sovereign debt investing for better long-term outcomes.
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OVERVIEW
Why we created this index: An urgent need for solutions
The report identifies the critical decline in natural capital, which comprises 47% of wealth in low-income countries, making it essential to global economic resilience. Human activity has reduced vertebrate populations by 60% and destroyed 50% of shallow-water corals in recent decades. Such degradation exacerbates climate change and systemic risks, particularly for poorer nations. Sustainable management of resources is vital to mitigate cascading financial and ecological consequences. Investors are increasingly focused on natural capital to assess sovereign risks, highlighting the need for a unified, data-driven framework to inform decision-making.
How the index works: Approach and methodology
The Climate & Nature Sovereign Index (CNSI) integrates real-time and forward-looking data to assess environmental risks across four categories:
- Biodiversity and natural capital: Includes deforestation trends, ecosystem degradation, and GDP impacts from resource depletion.
- Physical risks: Covers atmospheric, water, and agricultural risks, such as drought, flooding, and temperature extremes.
- Transition risks: Evaluates vulnerabilities tied to fossil fuel dependency and adaptation to decarbonisation trends.
- Financial and socio-economic resilience: Analyses fiscal stability, credit ratings, and socio-economic capacities to withstand environmental shocks.
The methodology utilises geospatial data and modelling from CMIP5 IPCC scenarios, ensuring cross-country comparability. It emphasises non-linear risk impacts, making it relevant for sovereign debt investors seeking to align portfolios with sustainability goals.
What the index tells us: Insights and implications
Key findings reveal that India and Gulf Cooperation Council (GCC) countries face high risks due to extreme heat, water scarcity, and weak transition readiness. In contrast, Costa Rica and Uruguay show resilience with effective natural capital management. Mediterranean countries, including Greece and Portugal, exhibit significant water and atmospheric risks, emphasising the urgency for targeted European Green Deal investments. Developed markets like Australia are highly exposed to transition risks due to heavy reliance on carbon-intensive industries.
Emerging market opportunities include green bonds for countries like Chile, Brazil, and Indonesia to address biodiversity loss and promote renewable energy. Specific recommendations include linking bond issuance to projects like watershed restoration and climate-resilient infrastructure.
Conclusion and next steps
The CNSI offers a pioneering approach to integrating environmental risks into sovereign debt assessments. By enabling evidence-based decisions, it provides a pathway for investors and policymakers to drive sustainable development. Future improvements will depend on enhancing geospatial data quality and fostering partnerships between financial institutions and conservation organisations. The report advocates for innovative financial instruments, such as Sustainable Development Goal (SDG) bonds, to align investments with ecological and economic resilience.
The CNSI not only measures risks but also highlights opportunities to reallocate capital towards sustainable projects. Collaboration among governments, investors, and data providers will be critical to refining the index and achieving a balance between financial returns and ecological preservation.