Emerging Perspectives

Can sovereign debt investors help save the planet?

Understanding environmental risks is key to profiling a country’s economic prospects and its ability to repay debt. Peter and Mike examine how geo-spatial research can help investors to assess these risks and encourage governments to adopt long-term fiscal agendas that serve people and the planet.
Understanding environmental risks is key to profiling a country’s economic prospects and its ability to repay debt. Peter and Mike examine how geo-spatial research can help investors to assess these risks and encourage governments to adopt long-term fiscal agendas that serve people and the planet.

Key points

  1. The degradation of nature threatens national economies and the systems that underpin human society globally.
  2. Understanding environmental risks is therefore key to profiling a country’s economic prospects and its ability to repay debt.
  3. Analysis of geo-spatial data and satellite imagery will increasingly allow sovereign debt investors to obtain more accurate and timely assessments of environmental change.
  4. This will enhance investors’ ability to evaluate and monitor environmental risks. It will also facilitate their engagements with sovereign issuers and encourage the adoption of long-term fiscal agendas that serve people and the planet.

Despite the importance of natural capital to a nation’s economic sustainability, until recently investors have generally paid scant attention to the connection between environmental factors and the long-term risk/return profile of debt issued by sovereign entities. In contrast, social and governance factors have been widely considered.

Current models to assess the risks associated with sovereign debt investments typically do not comprehensively integrate environmental issues, often relying on broad proxy indicators that may mask the complex nature of the environmental threats facing countries.

WWF and Investec Asset Management recently joined forces to assess the potential uses of geo-spatial research — both to measure environmental risk in sovereign debt portfolios and to facilitate engagement with governments to encourage fiscal agendas that serve people and the planet.

Spatial data can help investors conduct more robust, comprehensive and credible analysis of the systemic environmental risks facing sovereign bond issuers. And the quality of spatial data is improving rapidly, offering investors new research possibilities and enabling them to have greater confidence in their analysis.

With the world facing a looming climate and biodiversity crisis, new research techniques could transform investors’ ability to evaluate environmental risks. And for sovereign debt investors, they provide valuable opportunities to assess such risks at the country level.

By addressing environmental risks more fully and engaging constructively with issuers, sovereign debt investors can play a meaningful role in encouraging more responsible stewardship of the Earth’s natural capital.

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Emerging market: 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

Head of Fixed Income

Mike Hugman

Portfolio Manager

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