Earlier this year, we teamed up with conservation organisation WWF to explore how investors could use analytical tools based on satellite imagery to assess environmental risks in sovereign debt portfolios. With forest fires raging in Brazil, it’s clearer than ever that these tools are needed urgently.
As we argued in our joint paper, a country’s management of its natural resources can influence the sustainability and volatility of its growth over the long term. In turn, this can shape a government’s ability to generate revenues to repay its debt, and become a key driver of sovereign credit ratings and sovereign bond returns.
The reaction to the Amazon fires – which includes EU threats to block a trade deal and talk of consumer boycotts – underscores one of the main points we made in the paper: that environmental factors can have national-level economic impacts. What the long-term impacts will be in Brazil’s case will depend on what its government does next.
The rate of deforestation in the Amazon is much lower than it was in the 1980s and 1990s. But any return to those levels could, in time, have severe economic consequences for Brazil — to say nothing of the grave consequences for the planet.
It’s worth pointing out that the spatial datasets available for Brazil are more complete and longer-running than those obtainable for some other parts of the world. The Amazon fires are deeply troubling, but at least we know about them and can assess them in a historical context.
Satellite analysis will be key in helping the world monitor developments from here on. This is why we and WWF called on the investment community to work together to develop analytical tools based on spatial datasets. Such tools will not only enable portfolio managers to gain deeper, more timely insights into country-level environmental risks. They will also help them coordinate engagement to bring greater pressure to bear on governments and other stakeholders.
At the time of writing, our analysis – based on a broad range of inputs and the medium- to long-term outlook for Brazil’s economy – suggests that Brazilian fixed income generally offers reasonably good value. But the environmental risks associated with the country are clearly rising. As the use of spatial data within investing develops, sovereign bond investors will be able to track and evaluate these risks much more accurately — and, hopefully, do more to encourage sovereign issuers to protect their precious natural resources.
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