Biodiversity Risk, Natural Capital and actuarial practice

Biodiversity

This blog has been prepared by the Biodiversity and Natural Capital Working party, a volunteer group working under the Sustainability Board. The members are:  Aled Jones (Chair), Ryan Allison, Georgi Bedenham, Bhavin Bharadwa, Alex Darsley, Joseph Clyde, and Nick Spencer. 

Biodiversity is a top five global risk

There are more than 10 million different species of animals, plants, fungi and microorganisms on earth, and humanity depends on this biodiversity to survive and thrive. Recent studies have suggested that the mass degradation of natural habitats has led to a significant proportion of original biodiversity being lost worldwide, with global wildlife populations declining by as much as 60% in the last 50 years (a mass extinction). In its Global Risks Report 2020, the World Economic Forum ranked biodiversity loss and ecosystem collapse in the top five global risks in terms of both likelihood and impact. To put into context, this ranks higher than pandemics, cyber attacks or financial crises.  

Actuaries are well placed to consider the impacts of biodiversity risks

The services provided by nature, underpinned by biodiversity, support our economies but are often taken for granted.  Therefore, undermining these services poses not just an ecological, but a financial risk.  The economic and financial impacts of biodiversity loss are hard to quantify due to their long-term, uncertain and intangible nature, which means that actuaries are well placed to contribute. These risks will have a material effect on the principal areas of actuarial work and so should be taken into account when we carry out our work. This is an important topic on which there has been little actuarial discussion to date. It will include concepts such as natural capital and valuation of ecosystem services which are widely contested especially due to the use of financialisation and monetisation of nature.

The natural capital approach has been championed by the UK Government as well as various business groups.  This is controversial to some of the NGO and international community as they believe that it leads to unintended consequences including potentially worsening biodiversity outcomes and increasing global financial inequalities. Tools capable of assessing the impact of decisions/investments/projects on the environment in terms of costs and benefits need to be developed as we potentially transition towards conservation and a low-carbon economy. 

Initial paper on the importance of biodiversity to actuaries and areas for future development 

A working party has been formed to support the thinking in this area within the Institute and we are now publishing an initial position paper. This brings together our (collective) reflections on the political and regulatory context as well as the implications for actuarial work outlining the materiality of the risk, professional duty and public interest.  It also considers the concept of natural capital which we will investigate further to see how/if it can be of use to the actuarial profession. 

Building on this work we intend to:

  • Galvanise discussion and debate within the actuarial community on this important topic.
  • Develop think pieces on natural capital, valuation metrics, biodiversity & justice, and zoonotic disease risk.
  • Build a programme of webinars and blogs around the Convention on Biological Diversity conference in Kunming, China, 17-30 May 2021.  
  • Develop educational resources
  • Develop the case for a more detailed research study on the ‘Natural Capital’ approach (pros and cons) and data requirements. 
  • Provide inputs to upcoming business initiatives and government consultations as appropriate. 

COVID-19 offers a particularly important backdrop in which to start these discussions. Animal to human virus transmission is not uncommon, but of course rarely has such a global impact as COVID-19. However, how should actuaries include the risk of global pandemics into their register of systemic risks?.

We hope this paper is a useful introduction – and please watch out for further work in the coming months.

 


Want to hear more about Biodiversity? Listen to the Aled Jones and Gillian Rutherford discuss Biodiversity on the Sustainability Board’s SDG podcast series.