The ERISC project, short for Environmental Risk Integration in Sovereign Credit Analysis, aims to help financial institutions to integrate environmental risks in their risk assessments and investment decisions by identifying and quantifying how they can affect countries’ economic performance and thereby their cost of credit in the sovereign debt market. The project’s premise is that sovereign credit risk can be materially affected by environmental risks such as climate change, ecosystem degradation, water scarcity, and deforestation.
Phase I showed that environmental risks are material, and quantified this for five countries. In his second phase of research, we focus on food prices as one of the key transmission mechanisms between environmental risks and economic impacts and quantify these impacts for 110 countries. The global food system is vulnerable to changing environmental conditions. Climate change along with land and water scarcity will increasingly affect food production on the supply side. At the same time, demand for food will increase as a result of global population and income growth. The growing imbalance between rising demand for food and the capacity to supply it, will lead to greater variability in food production, higher and more volatile food commodity prices, and a higher likelihood of price shocks.
The results can inform bond investors and credit rating agencies, but also governments looking for ways to reduce economic impacts from environmental risks.