A new study published in Nature warns that financial collapse may follow nature collapse. The study examines how ecosystems contribute to economic productivity and how reductions in biodiversity are posing systemic economic risks. The study examines twenty-three countries and reviews future scenarios for tropical timber, wild pollination, and marine fisheries. The authors summarize their findings, stating:
“Biodiversity loss and deforestation are increasingly recognized as systemic economic risks. Yet, their implications for financial markets remain poorly understood. Here we study how biodiversity and ecosystem service loss affect financial risk for the world’s largest asset class, sovereign debt. Environmental degradation undermines the natural foundations of economic activity, reducing productive capacity and the ability of governments to service debt. Currently, sovereign credit ratings ignore these risks, meaning that markets may be mispricing, mismanaging and misallocating US$83 trillion of financial assets.”
This is the third report we’ve seen warning of underpriced nature risks in global markets. Last month, I wrote about ISS research and an ECB report, both of which found that nature-related risks are on the rise and underestimated. Biodiversity loss is well understood scientifically, but is not sufficiently priced into financial models. These studies and reports highlight the possibility that a bubble is forming. Markets will not be blind to these risks forever, and when ecosystems collapse, they may take many industries and economies with them.
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