Deliberating EM Debt

Introducing Ninety One’s Sovereign Biodiversity Index

Measuring government performance on nature and biodiversity

16. Okt. 2024

9 minutes

Peter Eerdmans
Nicolas Jaquier

Why measure nature and biodiversity

More than half of global GDP depends on ecosystem services – the benefits that human society derives from nature1. Sovereign debt investors therefore need a practical way to assess how governments impact nature and the risks stemming from biodiversity loss, as they can significantly influence economic performance and consequently a nation’s ability to service its debt.

This is particularly key for investors in emerging markets, where economies often rely heavily on nature, partly because of the relative importance of the agricultural sector. 

By assessing how governments are impacting nature and biodiversity, sovereign investors can also seek to direct capital to issuers that are doing the most to safeguard biodiversity by preserving natural capital.

In this paper, we present an index that provides a quantitative way for investors to assess nature and biodiversity risks at the national level. We have called it the Sovereign Biodiversity Index because biodiversity is a strong marker of how well a country’s ecosystem services are functioning.

Understanding nature - definitions
Natural capital

The Earth’s stock of renewable and non-renewable resources (e.g., ecosystems and the habitats and species they contain, water, soils, minerals and the atmosphere) that combine to yield a flow of services that benefit people2.

Ecosystem services

Services provided by ecosystems, such as: the provision of food, timber and fibre; purification of water; pollination of crops; protection from flooding and erosion; and regulation of the climate through absorption of carbon.

These services can provide economic, social, environmental and cultural benefits, the value of which may be understood in qualitative or quantitative (e.g., economic) terms, depending on context3.

Biodiversity

This describes the variety of life on Earth. It is most commonly measured in species richness — the total number of species in an area. Biodiversity includes the genetic variety within species and the variety of ecosystems that species create4.

Assessing nature and biodiversity at the sovereign level

Nature is one of the three environment (E) pillars we evaluate for all countries in our emerging market (EM) sovereign debt investment universe, alongside Climate Action and Climate Risk Mitigation. Our assessment is captured in our proprietary, forward-looking Natural Capital score.

To compute this score, we conduct both qualitative and quantitative assessments. Our qualitative approach involves conducting on-the-ground research, staying on top of news flow, canvassing opinions from NGOs working locally, and assessing government plans and actions.

This analysis is supplemented by quantitative assessments. In 2020, we launched the Climate & Nature Sovereign Index, which quantitatively assesses the long-term risks relating to climate change and nature loss at a country level. The following year, we launched the Net Zero Sovereign Index, which provides an independent, quantitative assessment of a country's progress towards net zero, within the context of a just transition5. The Sovereign Biodiversity Index we present here is the next quantitative tool underpinning our Environment score for emerging countries.

Fortunately, there is an abundance of data to help with sovereign biodiversity impact evaluations (as noted later). Partly, this is because it is relatively straightforward to assess biodiversity at the government or sovereign – as opposed to corporate – level, as national boundaries clearly define their areas of responsibility. However, it can be challenging to find data that quantifies the risks arising from biodiversity loss – i.e., the economic consequences of nature and biodiversity impacts.

To assess the latter risk, it is key to understand an economy’s reliance on ecosystem services. For some of these services, specific industry dependencies are fairly clear. For example, agriculture relies on pollination, fisheries need healthy oceans, and utilities require sufficient access to usable water. Other ecosystem services generate more generic benefits, such as the coastal protection provided by mangrove forests, or carbon storage and water catchment by forests. But while there have been some encouraging recent developments regarding biodiversity-risk data (see below), it generally remains poor. At present, overall quantitative views of nature and biodiversity risks at the country level typically either do not exist or only provide a snapshot in time. Absent of regular or consistent updates, data can quickly become old.

Data on nature

Historically, nature-related data has covered topics such as deforestation, proportion of protected areas, health of ecosystems, emissions, water quality, etc. More recently, biodiversity concepts like species abundance have been adopted. For instance, we like the Biodiversity Intactness Index developed by the Natural History Museum.

NGOs, universities and other organisations are carrying out some interesting work into the economic impacts of natural-capital depletion. The Global Futures Report by WWF, for instance, provides insightful and detailed information. Similarly, the World Bank has conducted research on the risk of extreme heatwaves and droughts by 2050.

The Sovereign Biodiversity Index

The Ninety One Sovereign Biodiversity Index comprises three pillars:

01 Quality of nature
02 Deforestation
03 Policy

We do not currently include a pillar on ‘risks from biodiversity loss’, given the lack of suitable data. We may revisit this in the future.

The Sovereign Biodiversity Index incorporates a variety of high-quality data sources. As noted, biodiversity data is relatively widely available and comprehensive indices already exist. For instance, Yale’s Ecosystem Vitality Index, which forms part of Yale’s Environmental Performance Index, offers useful insights and good coverage.

We incorporate this into our index, building on it to include:

  • More data, such as the Biodiversity Intactness Index, developed by the Natural History Museum.
  • A policy pillar, which includes progress made on relevant Sustainable Development Goals (SDGs) and environmentally aligned taxes.
  • A greater focus on 5-year and 10-year trends for some of the key indicators. This provides a clearer view of nearer-term trends, rather than metrics based on perhaps decades of environmental change.

In the next section, we outline the metrics underlying each pillar.

01 Quality of nature
Biodiversity Intactness – 10-year trend (last year/10 years ago)

The index shows ‘an estimated percentage of the original number of species that remain and their abundance in any given area’. We consider the indicator's change over the past 10 years.

Source: Natural History Museum.


Red List Index – 10-year trend

The Red List of Threatened Species is ‘the world’s most comprehensive information source on the global extinction risk status of animal, fungus and plant species’. We consider the change over the past 10 years.

Source: International Union for Conservation of Nature.


Environmental Performance Index (EPI) – ecosystem vitality scores

Overall, the index provides ‘a data-driven summary of the state of sustainability around the world. Using 58 performance indicators across 11 issue categories, the EPI ranks 180 countries on climate change performance, environmental health and ecosystem vitality’. We use the EPI sub-component on ecosystem vitality, which is based on the following policy categories: water resources, agriculture, forests, fisheries, biodiversity and habitat, and climate and energy.

Source: Yale (via Haver).


Ocean Health Index

This framework assesses ‘ocean health, based on the sustainable provisioning of benefits and services people need and expect from healthy oceans, such as food, cultural and social value, and jobs’. We use absolute measures, which include clean water, livelihood, fisheries, carbon storage and coastal protection.

Source: Ocean Health Index (via Haver).

02 Deforestation

Global Forest Watch provides data and tools for monitoring forests, offering near real-time information about where and how forests are changing worldwide. The metrics include relative and absolute measures, as well as different time horizons.

Source: Global Forest Watch (via Haver).

We consider the following:

Deforestation – five-year average

A composite score based on relative (percentage of forested area) five-year average annual deforestation rates. What percentage of existing forests is lost (or gained) over the past five years?


Deforestation – trend

A composite score based on relative (percentage of forested area) two-year trend in average annual deforestation rates. Is the trend in deforestation starting to slow, improve or deteriorate?


Deforestation – absolute trend

A measure of the absolute change in the area of forest within a country. We use the absolute level to indicate the global impact of forest loss from a country.

03 Policy
Sustainable Development Goals (SDGs)

Source: UN SDG (via Haver).

Sustainable Development Goal 12 SDG 12 (responsible consumption):
Assesses several factors that affect biodiversity, namely waste treatment, pollution associated with production, and imports and exports of plastic waste.
Sustainable Development Goal 14 SDG 14 (life below water):
Assesses the sustainable use of oceans and marine resources.
Sustainable Development Goal 15 SDG 15 (life on land):
Indicates protected areas in sites important to biodiversity, as well as of deforestation and imported deforestation (the amount of deforestation in other countries driven by imported products).

The SDG and related logos are referenced for illustrative purposes only and their use does not imply any endorsement of our products or services by the United Nations. Same font size as the source wording above the icons.


OECD environmentally aligned tax revenue

This is an assessment of the share of tax revenue that is environmentally related, e.g., tax on a ‘proven, specific, negative impact on environment’.

Source: OECD.


Protected areas

We consider:

  • Five-year trend: change in percentage of total land mass that is totally or partially protected.
  • Percentage: percentage of total land mass that is totally or partially protected.

Source: World Bank (via Haver).

Analysing the results

Putting all the data together, across the three pillars, gives an overall score for each country. This can be used to rank countries, although we find zooming in on the details and analysing the scores of each subcomponent is often the most useful. The top and bottom 10 sovereign debt issuers ranked by our Sovereign Biodiversity Index are shown below.

Top 10

Rank Sovereign Score
1 Slovakia 0.84
2 Venezuela 0.81
3 Austria 0.80
4 Slovenia 0.79
5 Belarus 0.75
6 Romania 0.74
7 Democratic Republic of the Congo 0.73
8 Estonia 0.73
9 Mongolia 0.73
10 Poland 0.72

Bottom 10

Rank Sovereign Score
107 South Korea 0.24
108 Egypt 0.23
109 Sri Lanka 0.23
110 Uruguay 0.23
111 Azerbaijan 0.22
112 Iraq 0.19
113 Saudi Arabia 0.18
114 Kuwait 0.16
115 Philippines 0.14
116 Singapore 0.06

Source: Ninety One. As at September 2024. For illustrative purpose only.

Seven of the top 10 are European countries. In part, this reflects stable and even improving trends in biodiversity intactness in some countries, which is counter to the global trend. Rewilding efforts and improved legal protections across the European Union have been relatively successful, as highlighted in a report co-authored by ZSL and BirdLife International in 2022.

Venezuela is also highly ranked, scoring well on indicators of ecosystem vitality and ocean health. Deforestation has also been on a downward (i.e., positive) trend, with the latest data for 2022 showing the lowest amount of deforestation in over two decades. Some of these encouraging developments must be caveated by the fact that Venezuela has experienced an economic collapse, which has imposed high social and economic costs and caused many Venezuelans to emigrate. Nevertheless, Venezuela has long had one of the highest proportions of its territory (almost 40%) as protected areas. On the other hand, illegal mining has grown rapidly under the Maduro regime. This has led to an increase in illegal deforestation and water pollution, which might not be reflected in official data yet. This underscores the importance of conducting qualitative analysis alongside index-data assessments in the context of active investment decision-making processes.

At the other end of the ranking, worryingly, the Philippines’ rich biodiversity is under serious threat from a fast-growing population and high levels of poverty, which is driving the over-exploitation of natural resources. The country is showing one of the sharpest declines in biodiversity intactness and a concerning rise in the number of species at risk of extinction. Deforestation has increased and overfishing is threatening marine biodiversity. The government has recently enacted several laws to protect the environment, such as the National Greening Program, but protected areas remain extremely small (3.7%) and woefully insufficient.

Index case study: Romania

Quality of Nature
10% 10% 5% 5%
Biodiversity Intactness – 10-year trend Red List Index – 10-year trend Environmental Performance Index (EPI) Ocean Health Index
0.72 0.98 1.00 0.28

Deforestation
10% 15% 10%
Deforestation – 5-year trend Deforestation – trend Deforestation – absolute trend
1.00 0.47 0.46

Policy
4% 4% 4% 4% 4% 15%
SDG 12 – responsible consumption SDG 14 – life below wate SDG 15 – life on land OECD environmentally aligned tax % revenue Protected areas – 5 year trend Protected areas %
0.54 1.00 1.00 1.00 0.02 1.00

Bucket scores
30% 35% 35% 100%
Quality Deforestation Policy Total
0.23 0.22 0.29 0.74

In summary

An assessment of how governments impact nature and the risks stemming from biodiversity loss is especially key for sovereign investors in emerging markets, where economies often rely heavily on nature.

Following on from the Climate and Nature Sovereign Index and the Net Zero Sovereign Index, the Biodiversity Index is the next quantitative tool underpinning our Environmental scores for emerging countries within our forward-looking ESG scorecards. It builds on Yale’s Ecosystem Vitality index (part of Yale’s Environmental Performance Index) to include: more data; a policy pillar, which includes progress made on relevant SDGs; and a greater focus on 5-year and 10-year trends to provide a clearer view of nearer-term trends.

By assessing how governments are impacting nature and biodiversity, sovereign investors can seek to direct capital to issuers that are doing the most to safeguard biodiversity by preserving natural capital.

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1 PWC – Managing nature risks: From understanding to action, April 2023.
2 The Dasgupta Review – Independent Review on the Economics of Biodiversity, Interim Report, April 2020.
3 The Dasgupta Review – Independent Review on the Economics of Biodiversity, Interim Report, April 2020.
4 Encyclopedia Britannica.
5 For more details on these indices please see Emerging Market Debt: Insights through a sustainability lens

General risks. The value of investments, and any income generated from them, can fall as well as rise. Costs and charges will reduce the current and future value of investments. Past performance does not predict future returns. Investment objectives may not necessarily be achieved; losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Specific risks. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Authored by

Peter Eerdmans
Nicolas Jaquier

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