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Published by: United Nations Environment Programme on Feb 22, 2013
Copyright:Attribution Non-commercial


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United Nations Environment Programme Finance Initiative (UNEP FI)
UNEP FI is a unique partnership between the United Nations Environment Programme (UNEP) and theglobal financial sector. UNEP FI works closely with over 200 financial institutions that are signatoriesto the UNEP FI Statement on Sustainable Development, and a range of partner organisations, todevelop and promote linkages between sustainability and financial performance. Through peer-to-peernetworks, research and training, UNEP FI carries out its mission to identify, promote and realise theadoption of best environmental and sustainability practice at all levels of financial institution operations. 
Global Footprint Network
Global Footprint Network is an international think tank working to advance sustainability through theuse of the Ecological Footprint, a resource accounting tool that measures how much nature we have,how much we use and who uses what. Global Footprint Network coordinates research, developsmethodological standards and releases annual data on the Ecological Footprint and biocapacity of232 countries and humanity as a whole. By providing robust resource accounts to track the supplyof and demand on ecological assets, Global Footprint Network equips decision-makers with the datathey need to succeed in a world facing tightening ecological constraints.
Unless expressly stated otherwise, the opinions, findings, interpretations and conclusions expressedin the paper are those of the various contributors. They do not necessarily represent the decision orthe stated policy of the United Nations Environment Programme, nor the views of UNEP, the UnitedNations or its Member States. Neither do they represent the consensus views of the member institutionsof UNEP FI. The designations employed and the presentation of material in this paper do not implythe expression of any opinion whatsoever on the part of the United Nations Environment Programmeconcerning the legal status of any country, territory, city or area or of its authorities, or concerningdelimitation of its frontiers or boundaries.Design: Instaprint, GenevaPublished in 2012 by UNEP FI and Global Footprint NetworkCopyright © UNEP FI, Global Footprint Network
UNEP Finance Initiative
International Environment House 15, Chemin des Anémones1219 Châtelaine, Genève SwitzerlandTel: (41) 22 917 8178 Fax: (41) 22 796 9240fi@unep.ch
Printed in Switzerland by Instaprint using vegetable-oil-based inks andFSC- (Forest Stewardship Council-) certified, elemental-chlorine-free paper. Permanent use of Stacatto random rastering enablesan ink-use reduction of 25 per cent, and a central water filteringplant reduces water and alcohol consumption by 75 per cent.
UNEP promotesenvironmentally sound practicesglobally and in its own activities. Thispublication is printed on 100% recycled paper,using vegetable-based inks and other eco-friendly practices. Our distribution policy aims toreduce UNEPs carbon footprint.
Sovereign bonds represent over 40 per cent ofthe global bond market, and are therefore oneof the most important asset classes held byinvestors around the world. At the end of 2010,outstanding sovereign debt was equal to USD 41trillion. Sovereign bonds have traditionally beenconsidered a reliable and risk-free investmentof choice by fund managers. Since 2008, thisperception is being increasingly challenged.A growing group of investors is recognising theneed for a broader understanding of emergingrisks in the bond markets. Furthermore, thereis growing concern over the mounting threat ofsystemic risks outside of the financial system,notably environmental risk, which can impactmultiple financial markets.Natural resources, both renewable, biologicalresources such as food and fiber, and non-renewable resources such as fossil fuels,ores and minerals, are critical to each nation’seconomy. Yet, to date, risks stemming fromrenewable resources in particular are notwell considered in sovereign credit riskassessments. As resource constraints tightenglobally, countries that depend, in net terms,on levels of renewable natural resources andservices beyond what their own ecosystemscan provide may experience profound economicimpacts as resources become more unreliableor costly.Traditional sovereign credit risk analysisappears to inadequately reflect pressures fromincreasing global natural resource scarcity,environmental degradation and vulnerabilityto climate change impacts.This report addresses how and why naturalresource and environmental risks are becomingfinancially material for sovereign credit risk,not just in the medium term, but even in theshort run. The E-RISC (Environmental Riskin Sovereign Credit analysis) methodologyfocuses on the development of metrics andmethods for quantifying natural resource andenvironmental risks so they can be incorporatedinto sovereign credit risk assessments.This initiative focused on one key piece: todemonstrate the potential materiality of naturalresource and environmental risks in the contextof sovereign credit risk analysis, which canaffect the underlying value of sovereign bonds.The methodology relies on the EcologicalFootprint and biocapacity metrics to assessa country’s resource situation in order toidentify how these risks might affect sovereigncredit risk. The traditional focus on renewablebiological resources by Global FootprintNetwork (such as fisheries, forests, croplandand grazing land) is supplemented with dataon non-renewable natural resources includingfossil fuels, metals and minerals to providea more comprehensive definition of naturalresources.The method and metrics developed in theE-RISC project lay the foundations for enhancedanalytics that can account for the growingmateriality of natural resource constraints forsovereign credit risk.
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