More than half of the world’s total GDP is at least moderately dependent on nature. But make no mistake, there is no economy (or life) without nature. A quarter of the animals and planetary species are now at risk of extinction, and key ecosystem services such as fertile soil to grow food, flood and disease control, and regulation of air and water pollution are essential. 14 out of 18 are in decline.
These ecosystem services are essential and cannot be easily replaced. Yet governments and the private sector spend nearly US$7 trillion (£5.4 trillion) a year on subsidies and economic activities that have negative impacts on nature, such as intensive agriculture and fossil fuel subsidies. . In comparison, only US$200 billion (just one-third of the amount estimated to be needed) will be spent on nature-based solutions.
Globally, the biodiversity crisis tends to be overshadowed by climate change, but the tide is changing. In 2022, the Kunming-Montreal Global Biodiversity Framework was adopted with the overarching goal of halting and reversing biodiversity loss by 2030.
At the end of October 2024, signatories to the framework will reconvene at the United Nations’ biodiversity conference, Cop16, in Cali, Colombia, to negotiate implementation of the goals. To move towards these goals, Cop16 aims to align finance with the framework. Effectively securing finances is part of the solution, not the problem.
To do this, financial flows need to change. A central tool here is risk pricing. Financial institutions face significant risks from both the degradation of ecosystem services (physical risks) and societal responses to degradation, such as changes in regulation and consumer demand (transition risks). However, these risks are not fully factored into financial decisions.
In addition to this, companies do not disclose nature-related risks, dependencies and impacts, making it difficult for financial institutions to understand the impact of their investments. Taken together, this means that finance continues to flow unhindered into riskier activities.
Central banks are now beginning to emphasize natural risks to financial institutions and examine the areas where these risks manifest within the financial system.
economic risks are real
Earlier this year, we published our first study on the severity of nature-related financial risks.
We estimate that in the case of the UK, nature-related shocks could cause a 6% decline in GDP by 2030 under scenarios such as declining soil health and water scarcity putting pressure on global supply chains. I discovered that. Additionally, increased human-wildlife interactions due to habitat loss and deforestation could reduce GDP by more than 12% in antimicrobial resistance and pandemic shock scenarios.
These results are on par with or better than the 6% decline in UK GDP following the 2008 financial crisis and the 9.7% decline during the coronavirus lockdown in 2020.
We also found that nature-related financial risks are on par with climate-related risks. Nature loss and climate change occur in parallel, amplifying and compounding each other. Therefore, it is important that the solution addresses both challenges simultaneously. After all, what is the point of the Earth becoming colder and no longer habitable?
The GBF includes 23 goals for 2030, including two that specifically address finance. Target 18 aims to reduce incentives for nature-damaging financial flows by at least $500 billion a year and expand incentives for nature-positive financial flows. And Target 19 aims to mobilize US$200 billion annually for nature restoration and protection, including at least US$30 billion from international finance flowing from developed countries to developing countries. I am. A further goal, Goal 15, requires companies to disclose nature-related risks, dependencies and impacts.
COP16 begins in Cali, Colombia.
So what does Cop16 need to do to pull the financial risk lever?
First, despite progress in the integration of climate risks, there is no international recognition that the long-term, widespread and often irreversible risks of the biodiversity crisis are not priced in by the financial system. It won’t. This can lead to the accumulation of systemic risk and lead to financial instability. Therefore, there needs to be a global consensus that central banks have an important role to play in taking proactive steps to address this.
Second, companies need to manage and disclose nature-related financial risks alongside climate risks at the individual, corporate and financial institution level.
Third, as with transition finance for net zero, financial institutions need to start actively engaging with their customers, exploring opportunities to support the transition to more nature-friendly activities, and incorporating this into their transition plans. There is.
Ensuring financial resilience and nature and climate goals are synonymous. And all of them are essential to ensuring global economic growth and sustainable development.
