If a nation's economy is heavily dependent on imported resources that are in increasingly short supply, should this be factored into that country's credit rating? It seems to follow that the more dependent an economy on limited resources the more vulnerable that economy would be to disruptions or reductions in supply or price instability.
Could an abundance of natural wealth be a factor in positively influencing a country's credit rating and the quality of its bonds? Could a resource-guzzling economy be cause for a downgrade?
The UN Environment Programme Finance Initiative (UNEP FI) in collaboration with Global Footprint Network and leading financial institutions will endeavor to shine a light on these questions with a groundbreaking project to explore the role of natural resource accounting in strengthening risk models for government bonds. The project seeks to incorporate how much natural wealth countries have and how much they spend into assessments of long-term credit risk.
"The global financial crisis has taught us more than anything that some of the core risks that affect the value of debt securities and derivatives can simply run ahead of our ability to understand them," said Paul Clements-Hunt, Head of UNEP FI. This is why we must deepen our understanding of the risks posed by climate change, water scarcity and the overuse of natural resources for securities. We should not be caught off-guard again. This project is one of the first that tries to quantitatively and systematically consider the linkages between the use of natural resources and its impact on a country's core economic indicators that in turn influence the quality of its bonds.
The study raises important and overlooked questions that go to the environmental stability of many leading countries including the United States and the emerging economic superpowers of China, India, Russia and Brazil. We're only beginning to grasp the havoc their economies will face from already unpreventable climate change, from their precarious and unsustainable water resources and from the rising global demand for other scarce resources, including food.