Financial risks of nature loss
17 Mar 2022 05:37 PM
Nature loss poses risks to the financial sector via the businesses they invest in, lend to, advise and insure. The financial risks of nature loss are embedded within the financial systems but are little understood or addressed by financial institutions. The POSTnote will outline the current understanding of the type and scale of the financial risks of nature loss and look at potential mechanisms to improve company level reporting and mitigation of both the financial risks of nature loss, and nature loss itself.
Documents to download
Nature provides services and benefits to humans which support our health, well-being as well as the global economy. The Dasgupta Review described how current economic systems have not accounted for our reliance on nature, incentivising the over-exploitation of nature beyond that which it can sustain. The financial sector is exposed to financial risks stemming from nature loss via the businesses they invest in, advise, insure and lend to. They are also linked to driving nature loss. For example, global banks have invested more than $2.6 trillion in activities which harm nature, while global subsidies which harm nature are estimated at $1.8 trillion a year.
There is increasing recognition that in order to achieve goals for the protection and restoration of nature, there must be systemic change in financial systems to embed nature in decision-making and move financial flows away from those which harm nature, to those that protect and enhance it. Previous targets for protection of global biodiversity have largely failed, but new targets will be negotiated at COP15 in Kunming, China in 2022. Its estimated up to $895 billion annually will be needed to achieve proposed targets, with changes to both private and public financial flows needed.
The financial risks of nature loss are already embedded in the portfolios of the financial sector, but there is little understanding or mitigation of these risks. Multiple frameworks to address and report on dependencies and impacts of nature are being developed, including the UK’s green taxonomy and the market-led Taskforce for Nature-related Financial Risks (TNFD). These disclosures could improve the consideration of nature in financial decision-making, but there are concerns that even if made mandatory for UK companies, they do not directly address nature loss itself. More direct policy and regulatory action could reduce and remove funding harming nature, including public subsidies, and incentivise increased funding for nature positive activities. Change in financial flows can also be facilitated by supporting the growth of green markets, such as through blended finance schemes and the UK’s Green Gilt can provide. It’s estimated nature and social positive financial opportunities are worth over $10 trillion and could create 395 million jobs by 2030.
Key points:
- The financial risks from nature loss are already embedded within financial systems, but are currently little understood, reported on or addressed by the financial sector
- Over half of the global economy estimated to be moderately or highly dependent on nature. Nature loss could threaten individual businesses, sectors as well as trigger economic downturns and threaten financial stability
- Current economic systems have not costed in our reliance on nature and there are calls for systemic changes to embed nature within economic and financial decision-making.
- Voluntary or mandatory reporting on the dependencies and impacts of businesses on nature are proposed to improve consideration of nature in financial decision-making.
- Disclosures can have limited impact, additional policy and regulatory action to reduce and remove funding for harmful activities could more directly address nature loss.
Acknowledgements
POSTnotes are based on literature reviews and interviews with a range of stakeholders and are externally peer reviewed. POST would like to thank interviewees and peer reviewers for kindly giving up their time during the preparation of this briefing, including:
POST Board members*
Professor Aled Jones, Global Sustainability Institute, Anglia Ruskin University*
Claire Wansbury, Atkins
Kate Vincent, Atkins*
Thomas Viegas, Bank of England
Dr Nicola Ranger, Smith School of Enterprise and the Environment, University of Oxford
Dr Nina Seega, Cambridge Institute for Sustainability Leadership, University of Cambridge
Jeremy Eppel, Finance for Biodiversity Initiative
Robin Smale, Finance for Biodiversity Initiative
Charlie Dixon, Finance for Biodiversity Initiative
Ryan Jude, Green Finance Institute
Adam Standage, Green Finance Institute
Sarah Draper, Global Canopy*
Helen Burley, Global Canopy
Dr Alastair Leake, Game and Wildlife Conservation Trust
Henrietta Appleton, Game and Wildlife Conservation Trust
Maddie Harris, Joint Nature Conservation Committee (JNCC)*
Dr Michael Urban, Lombard Odier
Dr Simon Dikau, London School of Economics
Duncan Vaughan, Natural England*
Stephanie Wray, Nature Positive*
Dr Martina MacPherson, ODDO BHF AM and Private Assets*
Dr Theodor Cojoianu, University of Edinburgh
Dr Katie Leach, ShareAction
Professor Jill Atkins, Sheffield University*
Dr Mira Lieberman, Grantham Centre for Sustainable Futures, Sheffield University
Dr. Gillian Rutherford-Liske, Swiss Re
Dr. Oliver Schelske, Swiss Re
Aidan Kerr, Swiss Re
Emily McKenzie, Taskforce on Nature-related Financial Risks
Katie Kedward, Institute for Innovation and Public Purpose, University College London
Professor Rachel Warren, Tyndall Centre for Climate Change Research, University of East Anglia
Dr Jeff Price, Tyndall Centre for Climate Change Research, University of East Anglia
Saskia Hervey, Earlham Institute, University of East Anglia
James Alexander, UK Sustainable Investment and Finance Association
Oscar Warwick Thompson, UK Sustainable Investment and Finance Association*
* denotes people and organisations who acted as external reviewers of the briefing
Documents to download