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Sovereign Environmental Risk

NAIROBI – Until the global financial crisis erupted four years ago, sovereign bonds had traditionally been viewed as reliable, virtually risk-free investments. Since then, they have looked far less safe. And many observers within and outside the financial sector have begun to question the models upon which credit-rating agencies, investment firms, and others rely to price the risks tied to such securities.

At the same time, it is increasingly obvious that any reform of risk models must factor in environmental implications and natural-resource scarcity. Indeed, a recent investment report underlined that the fall in prices in the twentieth century for 33 important commodities – including aluminum, palm oil, and wheat – has been entirely offset in the decade since 2002, when commodity prices tripled.