Financial markets are significantly underestimating the economic impact of biodiversity loss, potentially leaving countries exposed to sovereign debt crises and rising borrowing costs, according to new research published on Friday.

The study, conducted by economists from the Universities of Sussex, Sheffield and Heriot-Watt, introduces what researchers describe as the world’s first biodiversity-adjusted sovereign credit ratings model.

The researchers argue that current credit rating frameworks fail to account for environmental degradation, leaving an estimated $83 trillion in global assets vulnerable to mispricing.

Applying a modified version of S&P Global’s sovereign ratings methodology, the study found that even a partial collapse of critical ecosystems, including pollinator populations, marine fisheries and tropical forests, could increase annual global sovereign debt interest payments by around $162 billion.

“Financial markets are effectively blind to nature-related risks,” said Matthew Agarwala of the University of Sussex. “As biodiversity loss undermines economic performance, it becomes harder for countries to service their debt, raising borrowing costs and fiscal strain.”

Economic Impact Could Reach Trillions

The study highlights the importance of ecosystem services, such as crop pollination and seafood production, to the global economy. A partial disruption of these services could reduce global economic output by approximately $2 trillion each year.

Researchers found that the consequences for national creditworthiness could be substantial. India’s sovereign rating could be downgraded by four notches, while China’s could fall by more than five notches on a 20-point ratings scale.

Such downgrades would likely force governments to pay higher risk premiums, adding an estimated $50 billion to India’s annual debt servicing costs and around $70 billion to China’s.

Risk of wider financial fallout

The report warns that sovereign rating downgrades could spread through domestic economies, affecting banks, businesses and pension funds.

Pati Klusak of Edinburgh Business School said the findings reflect lessons from previous financial crises.

“The 2008 global financial crisis showed what happens when markets ignore emerging threats,” she said. “We risk repeating that mistake if ecological risks remain excluded from credit assessments.”

The study also identified countries including Indonesia, Bangladesh and Malaysia as particularly vulnerable, with potential downgrades of between four and six notches.

Calls for reform

Across the 23 countries examined, representing around 5.5 billion people, biodiversity-related rating downgrades could move many nations closer to sovereign default, the researchers said.

The additional debt servicing costs would amount to nearly three-quarters of annual global overseas development aid and represent a significant share of the funding target set under the UN Global Biodiversity Framework.

The authors called on regulators, central banks and credit rating agencies to incorporate nature-related risks into financial assessments, arguing that the cost of protecting biodiversity is far lower than the economic consequences of its decline.

Moritz Kraemer, a former sovereign analyst at S&P Global who contributed to the research, said credit rating agencies were failing to account for long-term environmental risks.

“By the time these bonds mature in 30 years or even 50 years they could be three or four notches lower,” Kraemer said. “That is a problem.”

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