New York - The degradation of natural resources negatively affects  countries’ ability to repay their sovereign debts, a new United Nations report  said, stressing that sustainable resource management is needed to  encourage medium- and long-term investments.

“We are seeing a paradigm shift due to natural resource  scarcities with profound implications for economies and, thus, sovereign debt  risk worldwide,” said the Executive Director of the UN Environment Programme  (UNEP), Achim Steiner, at the launch in London of the report " ERISC- A New Angle on Sovereign Credit Risk".

“The time has come for a better understanding of the  connection between environmental risk, and sovereign credit risk,” Mr. Steiner  added. “Only then will investors, credit rating agencies and governments be  able to plan effectively with the kind of insight aimed at ensuring long-term  economic health and stability.”

Loss of soils, forests and fisheries, as well as rising  resource costs, are becoming increasingly important to a nation’s economic  health, affecting its ability to repay or refinance sovereign debt, states the  report, issued by UNEP’s Finance Initiative (UNEP FI) – a global partnership between  UNEP and more than 200 financial institutions, including banks, insurers and  fund managers, which aims to better understand the impacts of environmental and  social considerations on financial performance.

The "E-RISC" project, according to UNEP, investigates sovereign credit risk from an angle that has  been largely overlooked by bond markets to date: natural resource risks and  environmental impacts. The project explored to what extent natural resource  risks can impact a country’s economy and thus, its ability to pay its debts. At the moment, environmental risks remain largely absent from traditional models that determine sovereign credit ratings and other  indicators of economic resilience. The report suggests that sovereign bond  ratings should take into account the way a country manages its natural assets,  to give investors more transparency when making investment decisions and  encourage governments to manage their natural resources more sustainably.

Five countries – Brazil,  France, India, Japan  and Turkey  – were analyzed as part of the report, highlighting major financial challenges  due to a growing gap between rising demands for resources like freshwater,  forests and soil, and the goods and services that countries can sustainably  provide.

The report shows that India  now demands 1.8 times more from its ecological assets than it is able to  generate, while France  demands 1.4 more resources than it can produce. Meanwhile, Japan met only 35 per cent of its renewable natural resource needs domestically in 2008, and Turkey is facing major risks
due to  water scarcity and desertification. Brazil was the only country that, although its ecological footprint has tripled since 1961, still generates more natural resources and services than its population demands.

“More and more countries depend on a level of resource demand that exceeds what their own ecosystems can provide,” said Susan Burns, the founder of Global Footprint Network, which collaborated with UNEP in the production of the report.
“This trend is tightening the global competition for the  planet’s limited resources and represents risks for sovereign bond investors as  well as countries issuing such bonds. A more accurate description of economic  reality is therefore in everyone’s interest,” said Ms. Burns.

To address the gap between demand and supply of natural  resources, the "E-RISC" report puts  forward a framework that aims to assess the likely risks connected to the  planet’s depleting resources, and to allow for a more comprehensive insight  into the stability of future national income.

Among its findings, the report estimates that a 10 per cent fall in the productivity of natural  resources, such as grazing land or forests, could force current trade  imbalances to grow wider – equivalent to an
additional four per cent of gross  domestic product – due mainly to a need for more imported goods.

The framework takes into account a country’s ecological  footprint and its capacity to generate resources and absorb waste, to connect  natural resource risks and environmental consequences with mainstream  macroeconomic indicators.