Nature loss could push countries into financial crisis, new research finds

A landmark study published today in Nature Ecology & Evolution shows that global financial markets are failing to account for the economic risks of nature loss. As a result, countries may be far more vulnerable to debt crises than investors realise.

Why nature matters for the economy

Nature underpins much of the global economy. Healthy ecosystems provide essential services such as crop pollination, fisheries, and timber production. When these systems are damaged, economies suffer.

The study estimates that even a partial collapse of key ecosystems, including wild pollinators, marine fisheries, and tropical forests, could reduce global GDP by around $2 trillion every year.

This economic hit doesn’t stay contained. It affects governments’ ability to repay their debts, something that global markets track closely through sovereign credit ratings.

Hidden risks in global finance

Sovereign credit ratings influence how much countries pay to borrow money. But current systems largely ignore the risks posed by biodiversity loss.

Using a new model that incorporates environmental degradation into credit ratings, the researchers found that many countries could face sharp downgrades if ecosystem decline continues.

For example:

• India’s rating could fall by four levels
• China’s could drop by more than five

These changes would translate into much higher borrowing costs, adding an estimated $162 billion in extra interest payments globally each year.

What this means for people

Higher borrowing costs don’t just affect governments they impact everyday life. As debt becomes more expensive, governments may have to:

• raise taxes
• cut public spending
• increase borrowing further

In the UK, for instance, around 11p of every £1 of tax already goes toward debt interest payments – more than is spent on education or defence. If environmental decline pushes these costs higher, the burden ultimately falls on taxpayers.

Countries most at risk

The study looks at 23 countries representing around 5.5 billion people.

It finds that nations with strong reliance on natural resources such as Indonesia, Bangladesh, India, China and Malaysia are particularly exposed. Many could face significant credit rating downgrades under realistic environmental scenarios.

In these countries, rising debt costs could be substantial. For example:

• India could pay an additional $49 billion a year
• China could face an extra $70 billion annually

Professor Matthew Agarwala says the findings highlight a stark choice for governments: “Invest now in nature recovery, or pay later through much higher borrowing costs.”

The research draws parallels with the 2008 financial crisis, when risks that were poorly understood or ignored triggered global disruption. Today, the concern is that biodiversity loss is another major risk that markets are overlooking.

The cost of action vs inaction

One of the clearest conclusions from the study is that protecting nature is far cheaper than the cost of losing it. Global targets call for around $200 billion per year to protect biodiversity. That is significantly less than the potential financial losses linked to environmental collapse.

The researchers are calling for:

• credit rating agencies to include nature-related risks
• central banks and regulators to factor biodiversity into financial decisions
• closer collaboration between economists and environmental scientists

Without these changes, the financial system risks “sleepwalking into a catastrophe,” according to the research team.

This study marks an important step in connecting environmental change with financial risk. For policymakers, investors and the public alike, the message is clear: nature loss is not just an environmental crisis – it is an economic one, too.

Check out the NE&E News & views article on this research below;