Ignoring natural capital could see countries' credit ratings downgraded

Will Nichols in Business Green: Degradation of a country's so-called natural capital could exacerbate the sovereign debt crises that have helped trigger, and deepen, the global economic downturn, the UN warned yesterday. A report by the UN Environment Programme's Finance Initiative (UNEP FI) says loss of soils, forests, and fisheries, as well as rising resource costs, are likely to become increasingly important to a nation's economic health – and may therefore affect its ability to repay or refinance sovereign debt.

However, despite the US, Spain, Italy and Greece all seeing their sovereign debt downgraded since 2011, environmental factors are still being overlooked by the models used to determine sovereign credit ratings.

The UN's analysis of France, Japan, India, Turkey and Brazil found all five countries are pushing their ecological assets to the limit and lowering their resilience to natural resources risks, such as spikes in commodity prices.

India, for example, is currently demanding almost twice as much from its ecological assets than they can sustainably provide, and this gap is growing. The report argues that population growth means an increasing amount of the country's natural resource requirements will have to be met through imports. As such, the country's ability to cope with commodity price shocks will continue to diminish, potentially undermining its credit-rating.

Meanwhile, France is sweating its natural resources at a level 1.4 times that which can be sustainably provided and Japan could only meet 35 per cent of its natural resource needs domestically in 2008, down from 73 per cent in 1961....

Mount Fuji and cherry blossoms, shot by Midori, Wikimedia Commons, under the Creative Commons Attribution 3.0 Unported license

Two crises, two shortsighted responses: Credit and energy

Tim Bond, head of asset allocation strategy at Barclays Capital, writing in the Financial Times: The global economy is facing twin shocks. Natural resource markets are delivering a supply shock of 1970s dimensions, while the financial system is delivering a shock comparable to the bank and thrift crises of the 1988-1993 period. The magnitude of each shock is very different. The financial markets require a recapitalisation of the banking system, with estimates ranging from $300bn to $1,000bn.

By contrast, prospective capital requirements in the resource markets dwarf the current needs of the banking system. According to the International Energy Agency, the global energy sector alone needs a real $22,000bn over the next two decades to meet the anticipated rise in primary energy demand. There is also the unavoidable necessity to reduce the CO2 intensity of energy production, a good 80 per cent of which is derived from the dirtiest of fossil fuels. While an accurate quantification of the size of the required green energy investment is not possible, it is likely to be of a similar scale to the expansion of energy supply.

...The broad story is of depletion. Most of the easily obtainable resource deposits have already been exploited and most usable agricultural land is already in production. Natural resource discoveries, where they continue to occur, tend to be of a lower quality and are more costly to extract. Meanwhile, the dwindling supply of unutilised land faces competing demands from biodiversity, biofuels and food production.

Predictably, the scale of response to each of these crises is in inverse proportion to their respective magnitude. In the US, the credit crunch has elicited an instantaneous fiscal package to the tune of $168bn, or 1.2 per cent of nominal GDP. In contrast, the latest annual budget appropriation for renewable energy spending is just $1.72bn – 0.01 per cent of GDP....

Biofuel pumps, Pete Birkinshaw, Wikimedia Commons