Quantifying the unseen: Building a nature and biodiversity risk-adjusted sovereign index

Key takeaways:

• Nature risks are financial risks: The paper underscores that biodiversity loss and ecosystem degradation are material risks for sovereign debt, affecting creditworthiness, for instance through impacts on agriculture, disaster resilience, and economic stability
• A three-pillar framework for sovereign analysis: We introduce a novel methodology, assessing countries based on:
  • Impacts, reflecting a country’s pressure on biodiversity (e.g., emissions, land use change, pollution)
  • Dependencies, measuring how much a country’s economy and population rely on healthy ecosystems and the services they provide (e.g., agriculture, water)
  • Policy, assessing the strength and effectiveness of national governance in protecting and restoring nature (e.g., conservation laws, adaptation plans)
• The simulated nature and biodiversity risk-adjusted sovereign index outperforms its benchmark: The proposed index, tilted using the three-pillar scores, delivers higher returns and better alignment with sustainability goals than the traditional World Government Bond Index (WGBI), with only modest increases in volatility and tracking error

Points of differentiation:

• Integration of nature into sovereign bonds: Unlike most ESG frameworks focused on corporate assets, this paper pioneers the integration of biodiversity and nature-related risks into sovereign bond indices
• Data-driven, multi-Source approach: The framework leverages a wide array of datasets—from satellite imagery to global biodiversity databases—ensuring a robust, multi-dimensional view of nature-related risks
• Quantitative tilt methodology: The index uses a geometric tilting approach based on composite biodiversity scores, allowing nuanced adjustments to country weights rather than binary exclusions or simplistic scoring

What does our research mean for investors?

Our research provides a way for investors to assess sovereign bonds not just by traditional economic indicators, but also by how countries impact and depend on nature, and how they govern nature considerations. This adds a forward-looking, sustainability-aligned dimension to sovereign credit analysis. By integrating nature-related risks, investors can better anticipate long-term vulnerabilities—such as climate shocks, food insecurity, or water stress—that may affect sovereign creditworthiness and bond performance. Moreover, this simulated nature and biodiversity risk-adjusted index outperforms the traditional WGBI in backtests, suggesting that nature-aware investing may deliver competitive returns while aligning with global sustainability goals.