Case study by WWF & Ninety One

In the spirit of showcasing leadership and raising standards of responsible investment among all our signatories, we are pleased to publish case studies of all the winning and shortlisted entries for the PRI Awards 2021.

Provide a short overview of the research innovation being proposed for the award

The Climate & Nature Sovereign Index (CNSI), jointly developed by conservation group WWF and investment manager Ninety One, responds to the urgent need for a single framework through which to assess climate and nature risk at the country level. The index is designed to help investors in sovereign debt assess environmental risks and to help nations develop policy and institutional mechanisms to make their borrowing more attractive and sustainable in the long term.

A pilot of the CNSI was launched in July 2020, alongside a research paper co-authored by Ninety One and WWF entitled Climate & Nature Sovereign Index: Introducing a framework for a clear assessment of environmental risk. The research paper describes how the CNSI enables investors to integrate environmental factors into their overall risk management and investment-decision-making processes. This, in turn, is intended to incentivise countries to establish environmentally responsible institutional and policy mechanisms to make inward investment and lending more attractive to the international investment community. The CNSI thus aims to help ensure that the vast amounts of capital invested in sovereign bonds – about US$50trn in 2020 – contribute to efforts to transition our planet on to a sustainable pathway.

Provide a description of the research innovation or report your organisation has introduced or published, and why you decided to undertake this approach

The natural world is in steep decline, creating systemic risks for economies globally. Between 1970 and 2014, human activity caused a 60% reduction in populations of mammals, birds, fish, reptiles and amphibians. The deterioration of biodiversity is strongly linked to climate change: the warming of the planet stresses ecosystems, changing habitats and lifecycles.

There is an urgent need for a coherent framework through which to assess long-term climate and nature risk at the country level – both to enable investors to manage those risks, and to encourage countries to adopt policies and mechanisms that, by safeguarding their natural assets and protecting the climate, make their debt more attractive to investors and hence ease their access to funding.

In 2020, Ninety One and WWF developed the CNSI, which covers both developed and emerging countries, to respond to this need. The index takes advantage of developments in geospatial modelling and remote sensing to incorporate real-time data and forward-looking projections. These datasets, which have only recently become obtainable and which are improving rapidly, provide the best insights yet into environmental trends and the condition of natural assets.

Using this data, the CNSI generates a broad range of risk indicators for constituent countries across four categories: biodiversity and natural capital; physical risks (chronic and acute); transition risks; and financial and socio-economic resilience. The CNSI has broad coverage, spanning developed and developing economies, and is forward-looking, using the most complete environmental datasets and models.

It also has several features that its creators believe make it an innovative addition to existing environmental-risk analytical approaches. The index:

  • Covers nature- and transition-risk exposures, as well as the climate risks traditionally measured in indices;
  • Makes explicit the economic and financial links to these exposures; and
  • Focuses on indicators based on modelling from the CMIP5 IPCC climate-model ensemble, where relevant, avoiding indicators based on older climate models.

Ninety One and WWF decided to take this approach because they saw a clear requirement for such an index among both sovereign-debt investors and national policymakers. For investors in sovereign debt, the relationship between a country’s natural resources and its economic performance is especially material. That is because natural-capital management influences ‘sovereign health’ – a country’s capacity to issue and repay debt.

Careful stewardship of natural resources can therefore improve a country’s ability to sustain revenues; conversely, growth at the expense of widespread natural degradation can have high economic and social costs. Those countries that can demonstrate effective natural-capital management should therefore enjoy lower borrowing costs and increased inflows into their government bonds, since more sustainable economic growth translates into lower risk for bond investors. The most progressive countries will permanently embed environmental factors into their monetary and fiscal policies and see the environment as inexorably linked to future prosperity.

Outcomes, benefits, challenges and next steps: provide an outline as to:

  • why you believe the report, process or approach is different and the aspects you believe are innovative;
  • the value this approach has provided or a summary of the key conclusions;
  • what you have you learned from this approach or report that can be applied more broadly.
  1. Uniquely, the CNSI combines the economic and financial factors that inform risk-modelling for sovereign debt investments with the risks related to natural capital and climate change. The resulting indicators are used to construct an index that facilitates cross-country comparison across developed and developing nations.

    The index makes explicit the economic and financial linkages to environmental risks, with the aim of making the CNSI useful to investors and policymakers. It employs a taxonomy aligned to investors’ needs and is also complementary to policy-oriented indices such as the Yale Environmental Performance Index. It includes a greater breadth of economic and financial indicators than that benchmark, so that the CNSI reflects the factors that are material for investors.

    The index incorporates real-time data and forward-looking projections. Thanks to ongoing work in geospatial modelling and remote sensing, these are now available for use by analysts. The CNSI also expands on existing environmental-risk analytical approaches by incorporating nature- and transition-risk exposures, as well as the climate risks traditionally measured in indices. Its creators believe there is growing recognition (not least because of COVID-19) that the earth’s natural systems are inextricably linked.

  2. The CNSI’s unified nature-related risk framework can help multiple groups contribute to the ultimate objective of protecting the natural world. It can help:

    • Governments attract investments and safeguard the natural world, and hence sustain economic growth;
    • Rating agencies to develop a more comprehensive view of sovereign risk by integrating factors related to climate change and nature loss into rating processes;
    • Sovereign debt investors improve the long-term resilience of portfolios and identify areas for investments in natural capital;
    • Other investors gain a full picture of risk, given that it is impossible to fully gauge company-level environmental risk exposure in frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) or the Bank of England stress tests. This is because individual company risks can be overwhelmed by broader risks to inputs, fixed assets and markets, and by sovereign financing shocks; and
    • International financial institutions and donors identify impact-based interventions that foster countries’ long-term transition to a sustainable economic pathway and highlight which countries are likely to find it harder to borrow or secure investment, and hence most need alternative sources of finance to support conservation.
  3. This project highlights that the new field of spatial finance, which harnesses the rapid evolution of satellite technology, computing power and machine learning, has an important role to play in enabling the financial system to facilitate the transition to a more sustainable global economy. As well as giving investors more real-time indicators to monitor habitats and protected areas (among many other uses), it is facilitating forward-looking forecasts and projections based on models that can be updated annually.

    It is thanks to developments in this field that Ninety One and WWF have been able to create the CNSI, but its potential application is far broader. With the increase in satellite observations, better computers and machine learning, we can expect the datasets to expand further. In the next couple of years, a wide range of open and commercial global datasets are to be published on relevant topics such as global oil spills, shipping activity, surface water change, agricultural performance, land cover change, biodiversity and heatwaves. These datasets will potentially be of high value to all those considering the environmental health and climate exposure of nations.