Nature and Debt

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Ok, let's get to today's story.

What's going on?

New report shows how environmental damage and biodiversity loss may lower a country's credit rating, including Indonesia.

What does it mean?

Remember when you go to a bank and apply for a loan?  The bank looks at your monthly income, assets, debt history, and spending level. Then they assign an interest rate based on those factors. What they are doing is assessing your creditworthiness, meaning how likely you are to pay back the loan.

It turns out the same thing applies to countries. When a country wants to borrow money from investors, it needs to prove its creditworthiness. And there are credit rating companies who do this evaluation (S&P, Moody's, Fitch). They look at a country's GDP growth, debt level, inflation, political stability, and then assigns a credit rating. Investors use this rating to judge if they should invest in the country's government debt.

What does this have to do with the environment?

Economic growth requires natural resources. In fact more than 30% of the Indonesian economy are highly dependent on nature.  And sometimes in pursuit of more and faster growth, governments and companies put environmental sustainability low in their priority list.

The risk?

Things like overfishing would lower marine biodiversity and reduce future output of fisheries. Over-cultivation of farmland would reduce the fertility of that land and lower future crop harvest. As a result, future GDP may decline and becomes a real economic risk to the country. And if that happens, investors would rate the country's debt as higher risk and demand higher interest rate to compensate for the additional risk. In other words, a credit rating downgrade for the country.

This new report shows a few different scenarios that estimates the financial consequence of ignoring enviromental risk. In the worst-case scenario, the government can expect to pay an extra USD 2.8 billion in interest payments each year. Money that could otherwise be used to build roads, hospitals, and schools.

What can we learn?

When researching this story, I am reminded of the importance of second-order consequences. Actions have consequences, but sometimes we only consider the immediate impact and not the longer term.

From reading this story, you may have asked: Well, why can't we just start doing more things to protect the environment now? A fair question. The thing is, conservation program takes money and it's not cheap. The benefit is not immediate, but rather in the future.

So the option is to pay now to protect the future sustainability of natural resources, or pay later in the form of lower future production and higher interest payment.

Tough choices indeed.

Until next time...

- Jason