Reversing the trend: Managing biodiversity loss in the UK

Grassland and flowers

The Environmental Audit Committee (EAC) published its report, Biodiversity in the UK: bloom or bust?, on 30 June 2021. The report calls on the Government to greater account for nature in economic decision making in order to address biodiversity loss. Comments within the report reflect and refer directly to evidence submitted by the Institute and Faculty of Actuaries (IFoA) to the EAC’s enquiry.

The world is witnessing a colossal decline in global biodiversity. Since 1970 there has been a 68 percent decrease in population sizes of mammals, birds, amphibians, reptiles and fish. The UK is one of the most nature-depleted countries in the world, with 15 percent of UK species threatened with extinction. Of the 19 Aichi biodiversity targets, the global nature goals the UK committed to meet by 2020, the UK failed to meet 14.

Reversing biodiversity loss requires transformative change. To achieve this, the EAC has proposed a package of recommendations spanning biodiversity monitoring, funding, policy implementation, economics and education. The IFoA’s evidence informed a number of the EAC’s recommendations.

Reviewing the fiscal framework

We recommended the natural capital inequality Ny/α < G(S), as outlined in the Dasgupta Review, should be put at the heart of the government’s economic objectives and setting of financial regulatory framework. At a minimum, regulators should have regard to retaining economic activity within sustainable resource limits.

Nature-related financial disclosure

The transformation that the financial system has undergone to integrate climate-related financial risks should be used as a roadmap for biodiversity. In addition to developing an understanding of economic and financial impacts of biodiversity risks, this should include development of parallel paths and initiatives that have generated success for climate change risks. To parallel the Task Force on Climate-Related Financial Disclosures (TCFD), we support ongoing efforts to establish a Taskforce on Nature-related Disclosure (TNFD) for the purposes of developing a reporting framework.

The TNFD will be tasked with delivering a framework to guide nature-related financial disclosure by the end of 2022. In line with this, the EAC recommended the Government commit to legislate for mandatory disclosure of nature-related financial risks once the TNFD framework is ready.

Creating the narrative for an inevitable biodiversity policy response

We identified that the Principles for Responsible Investment’s Inevitable Policy Response to Climate Change (IPR) has been a powerful tool for engaging asset owners and fiduciaries in managing climate risks. This work analysed the impact of a rapid market repricing to inevitable policy responses by global governments and illustrates the associated portfolio risks. In the same way that the IPR forecast does for climate change, we recommended building a parallel narrative around the policy response to the risks of biodiversity loss.

The EAC agreed and identified that in order to help the initiative the management of biodiversity risks within the finance sector, the Government needs to play its part in creating the narrative that robust and imminent policy responses to biodiversity are coming.

Building capacity and capability

The IFoA is a signatory to the Green Finance Education Charter. The Charter, developed by the Department of Business, Energy and Industrial Strategy (BEIS) and HM Treasury, has galvanized professions within the financial sector to become better educated and more aware of climate risks and the ways in which they can be managed. In line with our recommendation, the EAC has recommended the Government explore setting up a Biodiversity Education Charter to increase knowledge of biodiversity risk within the financial sector.

Nature-related stress tests

The Bank of England’s Insurance Stress Test for 2019 included an exploratory exercise into climate change stress testing. We recommended that a similar approach is adopted to develop stress tests for biodiversity loss. While it is likely that we are some time away from being able to confidently rely on the results of nature-related stress testing to inform its decision making, we believe these steps will encourage firms to start thinking about their exposure to nature-related risks. As such, the EAC recommended the Bank conduct an exploratory exercise into stress testing biodiversity loss, in order to provide the signals needed for the financial systems to manage biodiversity risks.

Fiduciary impediments

The many facets of the Law Commission’s 2014 report create, directly or by anticipation, barriers to integration of climate (and biodiversity) risks into the Fiduciary Duties of Investment Intermediaries. In line with this, the EAC recommended the Government commission a review into the Law Commission’s 2014 report on the Fiduciary Duties of Investment Intermediaries, given the developments in the understanding of climate and nature-related risks since the report’s publication.

Biodiversity loss poses serious risks for societies, economies and the health of the planet. IFoA’s Biodiversity and Natural Capital working party is considering and  promoting the urgent need for actuaries to take into account the importance, perils and impacts of global biodiversity risks. It also seeks to promote the role of finance in addressing the risks of biodiversity loss.