How Does a Country’s Ecological Balance Sheet Impact its Economy and Your Investments?
Susan Burns | Apr 18th 2016

The new edition of the National Footprint Accounts—which track over 200 countries’ annual demand for natural resources and ecological services—reveal trends that will impact our economies and, ultimately, your investments.

The historic Paris climate agreement signed in December 2015 brought together 195 nations and the European Union who committed to reducing their carbon emissions in order to keep global warming to under 2 degrees Celsius. The success or failure to manage this transition will be crucial for countries because the outcome could impact their economic health as well as their creditworthiness, with impacts on sovereign bond investments. For investors who are concerned about the implications on their bond investments, it is important to understand countries’ resource intensity, their ability to transition to a post-carbon economy, as well as their progress over time. Our National Footprint Accounts, can help investors and governments do just that.

Research shows that ecological issues do impact the economic health of countries in important ways, not only in the long term, but in the short term as well. Sudden changes in food prices, for instance, can send shocks across national economies and negatively affect sovereign creditworthiness. The risk of food price shocks is but one of the many issues that deserves further exploration. The pressing need for such research has been further acknowledged by prominent voices, such as Standard &Poors: The credit rating agency was the first of its kind in 2014 to report that climate change is a global mega-trend that could impact the credit ratings of countries. National economies are not sitting on the sidelines either: more recently, France passed a law that requires investors to disclose the carbon exposure in all asset classes in their portfolios, including sovereign bonds. Investors and policymakers are already being mobilised to take action on disclosure and to minimise the effects of climate change.

Investors need information and here is where the National Footprint Accounts step into to fill the gap: the recently launched 2016 edition of Global Footprint Network’s National Footprint Accounts track the demand for ecological resources and services for about 200 nations, with trend data for the past 70 years, based on nearly 200,000 data points per country per year. The accounts track a country’s demand for everything from fruits and vegetables, meat, fish, wood, fiber for clothing, timber and carbon dioxide absorption. This demand, the Ecological Footprint, can then be compared to the ability of a country’s ecosystems to meet this demand, also called “biocapacity”.  

In 1961, the first year for which consistent data sets are available, our planet was able to supply 37 percent more resources and services than humanity demanded. Since then, global ecological overshoot the amount by which humanity’s demand has exceeded nature’s budget — has widened substantially. The 2016 edition of the National Footprint Accounts shows that the world population demands 64 percent more than what nature can regenerate through overfishing, over-harvesting our forests and, primarily, emitting more carbon dioxide than our ecosystems can absorb. The effects include wildlife habitat and biodiversity loss, collapsing fisheries, and climate change. The Accounts also show that the carbon footprint currently makes up 60 percent of the world’s Ecological Footprint.

Looking at the world through the prism of the Ecological Footprint reveals trends on countries’ ecological wealth and associated risks, as well as the carbon-intensity and health of their economy. Here are a few highlights:

GIPS countries (Greece, Italy, Portugal, Spain) have been registering a steady decline of their Ecological Footprint per capita since the mid-2000s, primarily due to an economic slowdown. By contrast, strong European economies like Germany and France have seen a rebound of their Ecological Footprint per capita since the 2008 financial crisis. What would it take for the GIPS countries to strengthen their economies AND reduce their Ecological Footprints?

Spain’s Ecological Footprint and Biocapacity (Per Person)

GIPS_gfn

Asian countries which are rapidly expanding, such as India, China, South Korea and Vietnam, display a rapid increase of their Ecological Footprint per capita that is concomitant with their rising standards of living. Note that Vietnam and Cambodia stand out among Asian countries for their successful efforts to increase their biocapacity per person, by increasing their cropland productivity.

Vietnam’s Ecological Footprint and BiocapacityVietnam_GFN

High-income countries such as Australia and Canada, and large economies such as Russia and Brazil, have  large ecological reserves and slow population growth, but are nevertheless seeing a decrease in their per capita biocapacity, essentially eroding their natural capital.

Australia’s Ecological Footprint and Biocapacity

AUS_GFN

 

Now more than ever, investing in winning economies means investing in true ecological winners. This requires identifying all relevant environmental risks in your portfolio. You can’t manage what you can’t measure. The National Footprint Accounts can be used by countries to develop and evaluate sustainability policy, as well by investors to inform their risk assessments. Investing in winning economies means investing in true ecological winners, minimising environmental risks portfolios – and building a more sustainable future.

 


 

 

Global Footprint Network, the leading expert in natural resource accounting and a partner to South Pole Group, provides forward-looking risk data to fixed-income, banking, insurance and other finance professionals with exposure to country-level risk.

Find out more about National Footprint Accounts here:

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