Tuesday, August 19, was Earth Overshoot Day, the day when humanity’s demand for ecological resources and services exceeded what Earth will regenerate this year. Moving a few days earlier on the calendar each year, Earth Overshoot Day fell in early October back in the year 2000.
More than 80 percent of the world’s population lives in countries that are running an ecological deficit. That means they demand more resources and ecological services than can be supplied on a net basis by their own ecosystems. This trend is tightening the global competition for the planet’s resources and is becoming a more significant factor of economic performance, yet its influence is still underestimated by most analysts.
Our research has shown that resource constraints weigh on the balance sheets of individual countries in three ways:
- Through trade: Countries that compensate for ecological deficits through imports are exposed to trade-related risks such as commodity-price volatility and possible supply disruption.
- Through degradation: Soil, fisheries and forests that are overused or mismanaged can suffer from reduced yield, affecting production and possibly increasing countries’ reliance on imports.
- Through asset stranding: Many nations have invested in carbon-intensive infrastructure and industrial processes. Countries are unequally exposed in terms of the scale of needed reforms as governments around the world respond to climate change.
In order for countries to weather the storm, they will need to redesign their economies, minimizing their liabilities and optimizing their opportunities. This requires a shift on the part of governments, toward managing their natural resources as a source of wealth for their nations, rather than assets to liquidate on their way to economic growth.
Fortunately, the finance community is beginning to recognize the role of climate change and resource constraints in the economic health of nations. Last May Standard & Poor’s issued a report titled “Climate Change Is A Global Mega-Trend For Sovereign Risk,” becoming the first major credit-rating agency to recognize environmental risk in its forecast of countries’ economic health and ability to honor their sovereign debt.
S&P is also one of seven finance industry partners who have joined Global Footprint Network in launching Phase II of E-RISC (Environmental Risk Integration in Sovereign Risk Credit). Supported by UNEP FI (United Nations Environment Program Finance Initiative). This research project seeks to integrate ecological factors in sovereign credit risk models and investments. Our other partners include HSBC, European Investment Bank, Caisse des Dépôts in France, Colonial First State in Australia, KFW in Germany and Kempen in the Netherlands.
These efforts are among several significant shifts occurring in the industry that suggest a desire to turn the page on traditional institutions and norms.
Just last month the BRICS countries, through their New Development Bank, announced a $100 billion fund dedicated to climate change, sustainable development and infrastructure projects. The New Development Bank is a financial institution providing an alternative international financial system to the World Bank and International Monetary Fund.
In addition, the Chinese credit rating agency Dagong Global Credit is leading a new initiative to create a parallel credit-rating group. It launched Universal Credit Rating Group to complement the big-three rating agencies S&P, Moody’s and Fitch.
These recent developments provide opportunities for nations, especially emerging economies, to look ahead. After all, Western nations developed one hundred years ago under conditions that were very different from those of the present day. Nations are now developing in a world of resource constraints. Outdated models won’t serve us because the future will most certainly not be like the past.
The good news is that governments do have options. For one, the management of resources and fossil fuel dependence belong in the realm of political choice. Furthermore, shifting centers of influence are providing new openings to rewrite the rules.
Susan Burns is CEO and co-founder of Global Footprint Network, an international think tank working to make ecological limits central to decision-making by advancing the Ecological Footprint, a resource management tool measures how much nature we have, how much we use and who uses what.