Report published by UNEP and Global Footprint Network ranks countries on the economic risks they face from a hike in food prices

If global food prices double, then China could lose $161 billion in GDP and India could lose $49 billion, according to a new report released on 18 May 2016 by the United Nations Environment Programme (UNEP) and Global Footprint Network.

The UNEP-Global Footprint Network report, entitled ERISC Phase II: How food prices link environmental constraints to sovereign credit risk, features a table that ranks countries according to how badly they will be affected if global food commodity prices double.

In the future, the world will likely suffer from higher and more volatile food prices as a result of a growing imbalance between the supply and demand of food, the report notes. Rising populations and incomes will intensify the demand for food while climate change and resource scarcity will disrupt food production.

The report, which was published in collaboration with Cambridge Econometrics and several leading financial institutions, models the impact of a global food price shock on 110 countries to assess which countries face the greatest economic risk from this growing imbalance.

In terms of the highest percentage loss to GDP, the five countries that will be worst hit if food commodity prices double are all in Africa – Benin, Nigeria, Cote d’Ivoire, Senegal and Ghana. But China will see the most amount of money wiped from its GDP of any country – $161 billion, equivalent to the total GDP of New Zealand. India will see the second highest loss to GDP – $49 billion, equivalent to the total GDP of Croatia.

Among the report’s other key findings are:

• Overall, Egypt, Morocco and Philippines could suffer the most from a doubling of food prices in terms of the combined impact on GDP, current account balance and inflation.

• 17 out of the 20 countries most at risk from a food price shock are in Africa.

• Paraguay, Uruguay, Brazil, Australia, Canada and the US would benefit the most from a sharp increase in food commodity prices.

• Globally, negative effects of a food price shock massively outweigh positive effects in absolute terms. While China could see an absolute reduction in GDP of $161 billion, the highest absolute positive effect on GDP, seen in the United States, is only $3 billion –50 times smaller than the impact on China.

• In 23 countries, a doubling in food prices leads to a 10 per cent (or more) rise in the consumer price index.

• Countries with higher sovereign credit ratings tend to be less exposed to risks resulting from a food price spike. 

• Countries whose populations have the highest consumption of natural resources and services, and are therefore most responsible for the environmental constraints that make future food prices higher and more volatile, tend to face the lowest risk exposure.

UNEP Executive Director Achim Steiner said, “Fluctuations in food prices are felt directly by consumers and reverberate throughout national economies. As environmental pressures mount, it is important to anticipate the economic impact of these stresses so that countries and investors can work on mitigating and minimizing risk. And as the global population continues to rise, food prices can be a bellwether for how environmental risk translates to economic risk and vulnerability.”

Susan Burns, co-founder of Global Footprint Network and director of its Finance Initiative, said: “Now more than ever, in this era of climate change, identifying all relevant environmental risks is crucial to investing not only in equities but also sovereign bonds.

“As this latest research shows, disruptions to our food system represent one substantial environmental risk that both investors and governments may be largely overlooking but would be well-served to integrate into their risk analysis.”

The ERISC Phase II report was published in collaboration with Cambridge Econometrics and several financial institutions: Caisse des Dépôts, First State Investments, HSBC, Kempen Capital Management, KfW, and S&P Global Ratings.

The report builds on the first Environment Risk Integration in Sovereign Credit (ERISC) report published in 2012 by UNEP FI and GFN.

The overall objective of the ERISC project is to assesses how environmental risks such as deforestation, climate change and water scarcity affect economies, given that GDP, inflation and current account balances underpin some of the criteria that determine a country’s sovereign credit rating and the cost of borrowing on international capital markets.

UNEP and GFN would like to invite interested parties, governments, banks, investors and rating agencies to work with them to further decipher the link between environmental constraints and sovereign credit risk.

The ERISC report comes ahead of the release of a landmark report on food systems and natural resources written by the International Resource Panel (IRP), a consortium of 34 internationally renowned scientists, over 30 national governments and other groups hosted by UNEP.

The IRP report, which lists a series of solutions that will improve the world’s food system, will be released in Nairobi on 25 May at the United Nations Environment Assembly – the world’s de facto Parliament for the Environment.

---

Bracing for Food Shocks: The Economic Effects of Environmental Risk

Governments are increasingly coming to realize that climate change could have a significant impact on their economy. They should also recognize that the consumption patterns of their populations can have environmental and economic impacts far beyond their borders.

Countries with the highest consumption levels, thus contributing most to global environmental degradation, often face little risk themselves from the food price shocks that can occur as a consequence of environmental degradation and climate change. Conversely, countries facing the largest negative economic effects from food price shocks are poorer countries which have played little or no part in causing environmental constraints to expanded food production.

By taking steps towards more sustainable production and consumption, higher-income countries can help to alleviate the demand pressures that result in higher and more volatile food prices, thereby reducing both the food security and the economic risks facing poorer countries.

The ERISC Phase II report encourages governments, investors, credit rating agencies and banks to work together to further investigate the linkages between environmental risks and economic and socio-political impacts, and to better integrate this information into country risk assessments and investment decisions.

Growing populations, meat-based diets, water scarcity and the impacts of climate change can lead to higher and more volatile food prices. ERISC Phase II looks specifically at the effect of higher and more volatile food prices on national economies. If these impacts are significant enough, they may affect a country’s economy and potentially its credit rating and the risk exposure to bondholders.

Sovereign bonds have traditionally been considered a low-risk investment by investors and rating agencies, but the 2007-2008 global financial crisis, followed by the European sovereign debt crisis, may have altered this perception. While the underlying reasons behind the European sovereign debt crisis were not related to the environment, global investment analysts ought to increasingly consider altering their forecasting models to take into account environmental risks from natural resource scarcity, environmental degradation and climate change.  

Some are already doing so.

“Investors are increasingly seeking less carbon-intensive and more environmentally and socially friendly portfolios,” Tim Nixon, managing editor of Thomson Reuters Sustainability, wrote in a recent article says for Greenbiz. “Global bank HSBC recently reported that around 30 per cent of all assets under management are using some kind of sustainability strategy or filter. This trend is up from almost zero 10 years ago.”

Moreover, opinion leaders are weighing in on the issue: The 2016 Global Risk Report by the World Economic Forum found that the costs related to biodiversity loss, ecosystem degradation, water crises and failure to address climate change mitigation and adaptation were among the most severe risks the world faces. (The Forum engages the foremost political, business and other leaders of society to shape global, regional and industry agendas.)

And ratings agencies are also starting to take note: Both S&P Global Ratings and Moody’s highlighted climate change risk in recent publications.

Valuing the invisible

As environmental constraints and risks grow, countries are facing increasingly important economic impacts. This provides an additional motivation for countries to transition to a low-carbon and resource-efficient economy. Governments can benefit by starting to integrate the economic value of ecosystems into national sustainable development planning.

UNEP’s ProEcoServ project, which ran from 2010-2014 in four pilot countries – Chile, South Africa, Trinidad and Tobago, and Viet Nam – aimed to show how ecosystem assessment and economic valuation of ecosystem services can be better integrated into poverty reduction and national sustainable development planning. Taxes, subsidies and tariffs are also a powerful way through which governments can stimulate green growth thereby reducing environmental risks.

What’s in the new report?

ERISC Phase II focuses on food prices as one of the key transmission mechanisms between environmental risk and economic impacts at the national level.

The report explains that food-price volatility is partly driven by environmental factors, and that in the longer term global population growth, growing incomes (allowing more people to switch to eating more meat, for example), climate change, and increased water scarcity are likely to drive food prices upwards and make them more unstable.

ERISC Phase II models the impact of a doubling of global food commodity prices on three macro-economic indicators for 110 countries: GDP, current account balance, and inflation.