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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°145 ▪ 18th May 2018


Élie Hériard Dubreuil joins Beyond Ratings as Head of the Financial Rating division

Élie Hériard Dubreuil, previously Senior Director at S&P Global, joins Beyond Ratings as Head of the Financial Rating division. This will accelerate the roll-out of Beyond Ratings’ enhanced ratings offering of sovereigns, supranational entities and municipalities.

Please read our full press release for more information.


Protecting our land matters

The IPBES recently issued a report on the worldwide ‘critical’ worsening of land degradation, warning that it would impact at least 3.2 bn people and could lead to a sixth mass species extinction. On top of that, land degradation is a major contributor to climate change, with up to 36 gigatons of carbon sequestered in soil that could be released into the atmosphere by 2050. For instance, deforestation is responsible for 10% of human-induced greenhouse gas emissions.

Land degradation is a serious issue because these degraded lands gradually become unusable. Meanwhile, the human population grows and the demand for new lands is constantly increasing. Already three quarters of the Earth’s lands bear traces of human activity. By 2050, nine tenths of all available lands should be impacted. Some intense competitions can be foreseen between different land uses, including living areas, agricultural fields for food security, protected areas for biodiversity conservation or lands dedicated to climate change mitigation such as afforestation and bioenergy production.

Let’s focus on energy production. Fossil fuels – oil, gas, coal – currently represent 82% of the global energy mix, with high consequences in terms of greenhouse gas emissions. The current aim to limit carbon emissions on a global scale means reducing the energy production from fossil fuels and developing low-carbon energy sources. Yet, decarbonizing the energy mix poses this often-forgotten challenge: developing new energy production systems will require more lands, which may further exacerbate the competition over land use. The graph represents the land-use efficiency of different energy sources considered from two approaches.

First, the land intensity measured in terms of direct footprint represents the surface strictly required to produce one unit of energy, including areas taken by machinery, pipelines, reservoirs and access roads. Alternatively, the landscape-level impact includes additional regulatory or technical space requirements that some technologies need. For example, the direct footprint of wind energy (1 m²/MWh) counts the turbine area and access roads, whereas its total landscape impact (127 m²/MWh) additionally considers the required areas between turbines. Oil and gas technologies are also submitted to similar constraints with a necessary spacing between wells.

Natural gas, coal and fossil oil have low land footprints (landscape-level impact inferior to 10 m²/MWh), which means the area required to produce 1MWh of energy is relatively minor. The most reduced footprint comes from nuclear energy (0.1 m²/MWh), counting areas dedicated to waste storage. Renewables generally have greater land impacts than extractive energy. The land intensity from non-biomass renewables is between 5 m²/MWh and 20 m²/MWh – apart from wind energy, up to 130 m²/MWh. Biomass (excluding biofuels from residues) is the least land-use efficient source of energy and requires from 200 m²/MWh to 1,000 m²/MWh. In other words, land requirements to produce one unit of energy from solar photovoltaic and wind are 25 and 200 times higher respectively than from underground coal. For biomass this number reaches 1300.

Land-use efficiency (m²/MWh) in energy systems

Note: Energy sources without spacing requirement have the same value for direct and landscape-level impacts

Large areas will be required for energy expansion, even more if new energy developments focus on renewables. At a time when the competition for land use is already major and only expected to increase, ensuring all the needs of the population, energy supply included, whilst decarbonizing the energy mix will indeed prove challenging. A possible adaptation would be to co-locate some land uses: for instance, more biofuels could be produced from agricultural residues and wastes, urban areas can be optimized to host a part of the energy production – solar panels on rooftops, mini-eoliennes – and the spacing between eoliennes or oil and gas wells could be used to grow some crops. The question remains on whether nuclear, which have low greenhouse gas emissions in addition to limited land use impact, is also an acceptable solution.

Claire Hugo, Analyst – Source: IPBES, UNCCD, Trainor et al. (2016)



Sovereign Risk

Investors are more risk-averse to geopolitical tensions

Evolution of 10-year bond yields

Since Donald Trump announced that the United States withdrew from the Iran nuclear deal on Tuesday the 8th of May, southern European government bond yields have particularly increased due to uncertainties over the continuation of Iran’s nuclear deal and Italy’s inability to build a stable government. Indeed, the Italian 10-year bond yield skyrocketed by more than 33 bps while Spanish and Portuguese 10-year bond yields increased by 15 and 12 bps respectively. For the core countries of the Eurozone, the upward movement was less marked with German and French 10-year bond yields that increased both by 9 bps. Meanwhile, American and British 10-year bond yields increased by 15 and 10 bps.

All in all, uncertainties in Donald Trump’s geopolitical decisions weigh on oil prices and the USD, but also on risky assets such as the long-term peripheral European countries’ bond yields. Moreover, the Italian debt has also been penalised by political uncertainties undermining the Peninsula. After two months of negotiations, and lack of agreement on a parliamentary majority, the Italian President Sergio Mattarella recently announced that he would propose a “politically neutral” government to lead the country until December 2018.

Julien Moussavi, Head of Economic Research  –  Sources: Beyond Ratings, Datastream


Bigfoot’s footprint?

Country Overshoot Days

A country’s overshoot day is the date that Earth Overshoot Day would fall if all of humanity consumed like the people in this country. For Luxembourg and Qatar, overshoot day is mid-February, meaning that these countries consume the equivalent of 8 earths. At the other end of the spectrum, Honduras exactly fits Earth’s ability to regenerate itself in a year. Some countries such as Gambia and Eritrea (Resp. 0.57 and 0.3 earth equivalent) even allow Earth to rebuild its biocapacity and can be considered as sustainable from an ecological footprint point of view.

But this indicator, as all composite indexes, might hide different realities. Indeed, global footprint sums crop, grazing, forest and build up lands, fishing ground, and carbon equivalent footprint. Yet the weight of each of these footprints differs depending on the country. For instance, the global footprints for Estonia and Australia are almost the same but forests count for 46% of Estonia and 13% of Australia. As another example, crop land represents 59% of Djibouti’s footprint and only 8% of Uruguay’s for a similar level of ecological footprint. The only constant is the important share of carbon in footprint breakdown for high income countries (>60%). For them, this overshoot day looks like a carbon overdose day.

Emeric Nicolas, Head of Statistics  –  Source: Beyond Ratings, Footprint Network

Carbon/Climate Change

Water scarcities: not just climate change issues

Average precipitation from 1991-2015

In line with all the current talks about Cape Town running out of drinking water, the BBC issued a list of 11 major cities deemed the most susceptible to face water shortages in the future: São Paulo, Bangalore, Beijing, Cairo, Jakarta, Moscow, Istanbul, Mexico City, London, Tokyo and Miami. A look at average precipitations in these cities over the 1991-2015 period highlights the obvious: water scarcity cannot only be explained by the yearly amount of rainfall. All the cities sub-mentioned indeed get different volumes of freshwater available from precipitations and yet, all of them may face serious water shortages in the next decades.

Other than droughts and the sole lack of precipitation, various explanations can be given: heavy rainfalls concentrated in a short period of the year, rising sea levels resulting in sea water intrusion in freshwater, inappropriate reservoir capacity, loss of water through antiquated leaking plumbing systems, pollution of water bodies from agriculture and residential waste, over-pumping of aquifers, illegal well-digging, prevalence of asphalt preventing groundwater replenishment and lack of recycling. The natural causes for water scarcity are expected to aggravate with climate change. Though, it must be noted that most of these “scarcities” are man-made and non-climate related, therefore they could be prevented with timely actions and management.

Claire Hugo, Analyst  –  Source: BBC, World Bank Group CC Knowledge Portal


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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via; Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)


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