Spatial finance techniques empower investors and governments
By Jon Dennis, Shashank Singh and Susanne Schmitt, World Wildlife Fund-SIGHT
A new tool from WWF and global asset manager Ninety One, the Climate and Nature Sovereign Index (CNSI), enables investors to assess climate and nature risks in real-time alongside other economic and financial factors to inform their sovereign debt investments. The tool also allows them to harness sovereign debt in pursuit of sustainability and resilience.
Despite the importance of nature and its countless resources to a nation’s economic sustainability, to date, environmental factors have rarely been systematically applied to sovereign debt analysis. New spatial finance techniques, which harness satellite technology and machine learning in geospatial analysis to provide investors with more accurate and timely assessments of environmental degradation connected to investment activity, is changing this.
By integrating risks – such as those emanating from climate change and nature loss – financial institutions can reallocate capital towards mitigating them.
Assessing economic performance
Using real-time, forward-looking indicators, the CNSI supports assessment of climate and nature risks at country level as determinants of future economic performance, alongside other economic and financial factors.
CNSI sub-indicators cover aspects related to biodiversity and natural capital, physical risks such as water and heat, and other factors such as carbon exposure. These show how prepared or vulnerable a country is to these risks, enhancing understanding around challenges that many countries are already experiencing.
With tools like the CNSI, investors can integrate these factors into their investment and risk management processes, which influences where capital is allocated. Governments and development finance institutions can also use the tool to ensure capital continues to flow towards countries that are exposed to the worst effects of environmental risks.
As some governments rely on sovereign debt to meet the challenges of the Covid-19 pandemic, it is critical that investment decisions made now factor in all aspects that impact creditworthiness, including climate change and nature, to enable a resilient and sustainable long-term recovery.