Project Launch: Integrating ecological risk in sovereign credit ratings and government bonds

17 October, 2011, Time: 1:00 pm – 5:00 pm | Washington D.C.

Venue: UN Foundation, 1615 M Street, Washington D.C. 20036 UNEP FI, Global Footprint Network and a number of leading financial institutions are collaborating on a potentially transformational project to investigate the linkages between ecological risk and country level risk in sovereign bonds.

Registration

We invite you to join the launch of the project on 17 October in Washington D.C ahead of the UNEP FI Global Roundtable. The event is meant for financial institutions with an interest in sovereign bond markets that may consider joining the project, as well as those investors and banks that have already confirmed their participation. .

Background

There is overwhelming scientific evidence indicating that we are using the Earth’s natural resources in an unsustainable way – namely by demanding more than can be supplied in renewable manner. As consumption rates increase these resources are becoming more and more constrained. Even though there is an intuitive feeling that natural resource constraints have a financial impact on businesses and society in general, there is at present very little evidence that support that (over)use of our natural capital actually affects bonds and equity prices. Though there are many factors that affect prices in markets in any given time, there is challenge to gather robust, quantitative evidence of this link. This project focuses specifically on sovereign credit ratings and bonds. It aims firstly to assess the financial materiality of ecological risks relevant for the credit risk evaluation of government bonds; and secondly to develop a methodology to explore how credit rating agencies, investors and financial information providers can integrate ecological data into their respective models. Through it, the project hopes to:

  • Demonstrate whether a link can be established between a country’s ecological management and its economic health and therefore its ability to pay back sovereign debt
  • Develop a scientifically robust methodology to pre-emptively factor this ecological risk into credit risk rating of sovereign debt in a more sophisticated manner than has as yet been achieved
  • Build a more comprehensive and risk-inclusive understanding of how to evaluate government bonds’ performance
  • Build awareness and decrease investment risk due to higher resource stability for both ecological creditors and national debtors
  • Incorporate a more holistic risk framework into risk models, international ratings and other financial risk assessment systems
  • Disseminate results and knowledge to the finance sector in a series of interactive forums and a public report

We hope this initiative will decrease investments risks by gaining a better understanding of resource stability for both biocapacity creditors and national debtors. This project will enable those involved in sovereign bond markets to work towards better inclusion of financially-material environmental, social and governance (ESG) issues.

Contact

Ivo Mulder – biodiversity [at] unepfri.org Gemma Cranston – gemma [at] footprintnetwork.org