COP15: Exposing the risks of nature dependence

Robin Millington and John Willis – Planet Tracker’s CEO and head of research lay out the financial and economic challenges faced by nations that rely on nature

Conflict in Ukraine has pushed the trade of natural resources – such as oil, gas and wheat – to the top of the international agenda. But many of the systemic risks associated with the trade of these commodities long pre-date the war – for instance their exposure to external risk factors such as extreme weather events, which have become increasingly commonplace over the last decade due to the effects of climate change, or their contribution to deforestation.

No country is immune to these challenges, and while discussion at COP27 centred on climate emissions and reaching net zero, it also committed time to discussing the fashion supply chain and food systems, the latter of which accounts for approximately 30 percent of global emissions and is predicted to be responsible for feeding nearly 10 billion people by 2050.

Despite having been formed in the 1990s, as was the climate change process, the biodiversity COP has not gained the same momentum and thus not the same sense of urgency.

As a result, vital discussions that need to be had around nature and natural capital have not been focused on by financial markets – until now. In the past 18 or so months, we suddenly see the issues of nature, natural capital and nature-based solutions rising rapidly up financial institutions’ consciousness.

High nature-dependency means low credit ratings

Something that must gain visibility on the biodiversity COP agenda is the plight of countries with high exposure to nature-based exports – also known as nature-dependent exporters (NDEs).

NDEs are defined as those for whom a significant portion of exports are nature-dependent, including renewable exports such as crops, and non-renewable exports such as minerals and oil.

Our recent report, Nature Dependent Exporters: What do they have in common?, found that while water stress has been low among NDEs – likely because it is a prerequisite for most natural resource production – soil erosion is high. That’s a big problem as it degrades the value of the land and reduces a country’s capacity to produce the renewable exports it relies on. It’s the equivalent of having a factory in which all the machinery is rapidly deteriorating, while trying to manufacture at a steady or growing rate.

The same report also found that the more a country depends on natural resources – renewable or not – the poorer its credit rating is, which in turn means higher interest payments.

This may be partly because of the volatility of natural resource commodity markets, and partly because natural resources are more often captured by smaller groups in society. The entire point of such capture is to retain resource rents for private use, negatively impacting the investment ratio. This also effects overall economic growth, reducing a nation’s capacity to repay its debts and improve its credit rating.

We observed that mean credit ratings for each NDE group have fallen in recent decades, but not equally.

The gap between high NDE and low NDE countries has widened somewhat. When we examined the countries in the 38-member OECD to see whether the relationship between high nature dependency of exports persists, we found that OECD credit ratings have remained robust while the rest of the world has been degraded. So, HNDEs that are not OECD members have suffered the most aggressive credit rating downgrades.

This is worrying as all corporate bonds are sensitive to sovereign credit ratings, meaning the economic growth potential of non-OECD countries – which are more often than not developing nations – is being hindered by their dependence on natural capital.

The irony is that the countries that need the most funding assistance to tackle the problems contributing to and arising from nature dependence are more likely to have to pay a higher price for the debt due to low credit scores, which is a result of their nature dependence.

And with growing advocacy for better representation of environmental and natural resource-related risks into estimates of sovereign debt risk, the credit ratings of HNDEs are likely to get even worse if the underlying risks remain unaddressed.

Financial markets step up

Clearly, financial and natural capital are innately interwoven. But while financing change was a big focus at COP27, COP15 remains a few steps behind. The conference is expected to concentrate almost exclusively on securing a ‘Paris-style Agreement’ by establishing an international biodiversity framework that will subsequently guide international policy.

Despite this, the financial services sector can – and in some ways, already is – take greater responsibility for joining the dots.

In fact, in many ways, financial institutions are approaching the problem with a more holistic process than the UN’s COPs. For example, the latest report by the Taskforce on Nature-related Financial Disclosures (TNFD) – version 0.3 – openly borrows parts from the Taskforce on Climate-related Financial Disclosures (TCFD), suggesting an intentional effort to integrate the nature framework with the climate framework.

So, while corporate behaviour can often be a source of ills for the natural world, a shift has begun to take place towards protecting natural resources and biodiversity.

Natural resources underlie our industrial system and awareness is rapidly growing that industries cannot continue if the underlying resources are not properly stewarded. There is a growing pool of ESG-focused investors seeking to mitigate portfolio risk. Companies and investors are now beginning to integrate nature and biodiversity considerations into their research, engagement and investment processes.

As part of this, they must begin to understand and address the dependence of international trade and corporate bonds on nature. Currently, $44 trillion of global output and 40 percent of global trade are dependent on natural resources. Six countries are dependent on renewable resources for more than 90 percent of exports, raising questions about the scale and concentration of nature dependence.

For investors to gain such understanding, they must push for clear, comprehensive, high-quality information from the companies in their portfolios, including their exposure to export risks, and how they are or aren’t contributing to the building of sustainable economies for NDEs.

More broadly, more dialogue must be opened up between companies and investors, with support from government, to drive co-ordinated and effective action.

One initiative set to progress dialogue between companies and investors is the newly forming Nature Action 100 (NA 100).

Set to launch at COP15 in Montreal next week, it aims to drive greater corporate ambition and action on tackling nature loss and biodiversity decline. Investors involved in the initiative will engage with companies in sectors with the largest impacts and nature dependencies, as well as policymakers, to push forward timely and necessary actions that protect and restore nature and its ecosystems.

The secretariat and corporate engagement work stream will be co-led by the sustainability advocacy non-profit Ceres and the investor network Institutional Investors Group on Climate Change (IIGCC), with a group of launching investors including BNP Paribas Asset Management, AXA Investment, Blue Capital and Domini Impact Investments. Planet Tracker will co-lead the Technical Advisory Group with the Finance for Biodiversity Foundation.

Achieving a net-zero, nature-positive global economy

At its most basic, natural capital represents the raw materials that are used in the systems that support human life. These aren’t just biological systems, but things like mining for lithium, cobalt and copper. And they are fundamental to global economies, including those transitioning to a more sustainable model.

Currently, environmental and financial discourse is overly centred on achieving net zero – but this doesn’t necessarily help to solve the equally pressing challenges of biodiversity. Biodiversity is particularly important when it comes to soil health and agriculture, deforestation, wetlands, oceans health and so much more, all of which dramatically impact the world economy, particularly for nature-dependent nations and their economies.

One step forward would be to dovetail the two existing COPs to de-silo the conversations, recognising that climate is nature, and climate change and nature are fully interdependent. To do this, we would need to ensure that net-zero objectives and actions don’t create unintended consequences for other parts of our natural capital system.

We also need to ensure that financial markets participants are being incorporated into these conversations and that they put pressure on corporate management for real change, not just box-ticking and greenwashing.

To preserve our world for future generations, we must both reduce emissions and reverse nature loss – something we cannot do without a financial system that is fully aligned with a net-zero and nature-positive economy.

Robin Millington is CEO of financial think tank Planet Tracker. John Willis is director of research