INSIGHT by the University of Oxford
〉“Nature is not the elephant in the room, it’s the huge green scorpion running towards us” – Dr Nicola Ranger, lead author of Oxford study
〉Erosion of natural capital linked with biodiversity loss and environmental degradation generates significant and long-term risks to society, the economy and finance, including Value at Risk from loss of pollinators to agriculture of over $400 billion and risks to global supply chains from water stress and pollution of more than $5 trillion.
〉We urgently need to develop analytics and scenarios to understand the potential scale of nature-related financial risks and their timescales.
〉Researchers have produced evidence-based set of building blocks for constructing physical nature-climate scenarios for financial risk assessment and an open methodology for preliminary risk screening that can work across all countries.
〉The study underlines the potentially catastrophic impacts of climate change and the critical importance of integrating climate and nature in our response to these threats.
Shocks to the global economy related to biodiversity loss and ecosystem damage could cost upwards of $5 trillion, according to reports from Network of Central Banks and Oxford University. Human-driven pollution, deforestation, land-use change and over-extraction, are fundamentally eroding the natural capital upon which our societies and economies are built – including our water, clean air, fertile soils and pollinators – and act as ‘risk amplifiers’ on the impacts of climate change.
Since the agreement of the Kunming-Montreal Global Biodiversity Framework (GBF) in late 2022, the critical economic importance of nature has risen fast up the agenda, and with this new study, the potential systemic implications for our economies and finance are becoming clear. Finance is an important part of the solution to nature recovery; understanding the risks is the first step to redirecting financial flows away from activities that undermine nature, such as deforestation, and toward those that protect and restore natural systems.
The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) – the network of over 120 Central Banks and supervisors globally – has released recommendations toward the development of scenarios for assessing nature-related economic and financial risks.
As part of the work of the NGFS Task Force Nature, Oxford’s Environmental Change Institute has studied the development of scenarios for climate-nature shocks and gathered the evidence on the macro-criticality of nature for the global financial system. The analysis focused on three risks: water, pollution and pollination.
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The ECI study concludes that the erosion of natural capital linked with biodiversity loss and environmental degradation generates significant and long-term risks to society, the economy and finance, from increasing the risk and impacts of pandemics, floods and droughts, to undermining water quality and supplies, soil erosion, damaging agricultural production and risks to human health.
Published in the final hours of the 2023 UN Climate Change Conference (COP28), the ECI study underlines the potentially catastrophic impacts of climate change and the critical importance of integrating climate and nature in our response to these threats.
Dr Nicola Ranger, lead author of the ECI study and Director of the Resilient Planet Finance Lab at the Environmental Change Institute, comments, ‘Protecting and restoring nature is essential for the functioning of our economies and a vital component of adaptation to climate change.’
‘Nature is not the elephant in the room, it’s the huge green scorpion running towards us. The sting in its tail will significantly amplify the impacts of climate change in ways that are difficult to predict. It’s not just about birds and butterflies, we are fundamentally eroding the natural capital upon which our societies and economies are built.’
–Dr Nicola Ranger, lead author of the ECI study and Director of the Resilient Planet Finance Lab at the Environmental Change Institute
Professor Michael Obersteiner, Director of the Environmental Change Institute, adds, ‘This study provides an inflection point towards macro-resilience by visualising and credibly articulating the forward-looking dynamic risks associated with the erosion of natural capital. Our methodology will empower the finance sector to deliver Planetary health.’
Global food systems are revealed to be at particularly significant risk as a result of soil erosion, land-use change and loss of pollinators, aggravating the impacts of climate change. Global supply chains are shown to be a significant risk from water scarcity and pollution.
The ECI study also highlights the challenges for financial institutions in managing these risks that are currently not fully accounted for within the financial system. For governments and regulators it recommends a precautionary approach, including an urgent need to identify and assess risks, in line with the recent recommendations of the Taskforce on Nature-Related Financial Disclosures, and identify potential gaps in regulation.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
