Today the IFoA publishes its new report for actuaries on nature related risks. Here the report’s author Lucy Saye explores why the finance sector needs to address biodiversity loss and the central role that actuaries can play.
Human societies are embedded within and dependent upon nature. This may seem an obvious point – we obtain critical resources that support life such as food, water, and medicine from nature. We rely on insects to pollinate our crops, trees to provide shade and absorb pollution, and habitats to provide homes for wild species. There are also cultural influences important for art and recreational activity.
In short, we rely on nature to support life on earth. In terms of economic benefits, the World Economic Forum estimates that $44 trillion, over 50% of global GDP, is moderately or highly dependent on nature. (See Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy.) This of course only includes the things we measure in money, with the true value much higher.
Despite the benefits nature affords humans, we collectively do not reciprocate. Human activity is driving nature loss and the underlying drivers have accelerated over the past 50 years. Significant impacts are now found across 75% of the global land surface and 66% of global ocean area and over 85% of wetlands have been lost. That’s according to the ‘Global Assessment Report on Biodiversity and Ecosystem Services’.
Unsurprisingly, animal and plant populations are in decline, with around one million species threatened with extinction, finds the same report. It is important to note that impacts on nature and biodiversity are not evenly distributed. The majority of lands managed by indigenous peoples and local communities are in good ecological condition, highlighting their role as vital custodians. See ‘The state of Indigenous Peoples’ and Local Communities’ lands and territories’.
Since well-functioning ecosystems are stores of carbon, nature and biodiversity loss is inextricably linked with climate change. Both forces interact with each other to worsen collective impacts. Moreover, human activities that drive climate change and biodiversity loss also drive infectious disease emergence. It is now well recognised that considering them together is key to successfully addressing either issue.
This is recognised in the 2022 Kunming-Montreal Global Biodiversity Framework. It aims to halt and reverse biodiversity loss by 2030 through a series of 4 goals and 23 targets. These include ensuring adequate financial resources for implementation. Effort will be required to align financial flows with the goals and enable businesses to monitor, assess, and disclose their impacts on biodiversity.
As with climate related risks, nature related risks amplify risks in an organisation due to systemic impacts that have multiple transmission channels to the financial sector. At the same time, actions taken by the financial sector have impacts on nature. It’s not surprising an increasing number of central banks and regulators are highlighting the need for financial institutions to identify and manage their nature related risks.
Actuaries who advise these firms will need to:
To do this, actuaries will need to understand the activities that drive biodiversity and nature impacts and their interactions and explore how these risks may emerge.
Nature related risks are complex and subject to large amounts of uncertainty. That uncertainty is due to interactions with climate change, the presence of tipping points, and the policy response, to name but a few. This means techniques to manage uncertainty – such as exploring sensitivities and scenarios, ensuring adaptability and resilience, and considering adverse outcomes – will be key.
Today we’re publishing our new report: ‘Biodiversity and Nature Related Risks for Actuaries: An Introduction’. It is designed to assist actuaries on their learning journey, highlighting the relevance of biodiversity and nature related risks to actuarial work.
The report:
Read the report at: Biodiversity and nature related risks for actuaries: an introduction
