Biodiversity loss is one of the greatest challenges facing humanity. This series of blogs, from the IFoA’s Biodiversity Working Group, explores how this could impact companies, countries, and economies.
In this blog series:
This blog draws heavily on the paper ‘Central banking and supervision in the biosphere’. The 2022 publication is from the Network for Greening the Financial System (NGFS) and the International Network for Sustainable Financial Policy Insights, Research, and Exchange (INSPIRE). It provides further background on the matters discussed here.
We have summarised a few recent studies on how the financial sectors in different countries depend on, and impact on, nature. The first 2 studies (from the Netherlands and France) consider the wider financial sector including banks, pension funds, and insurance companies. The other studies focus on the banking sector.
For ease of presentation and comparison, we have simplified the results. Readers should refer to the underlying papers for full details of these studies.
The studies identified the following dependencies in the:
The percentages above represent the proportion of investments or loans where the counterparty is rated as highly dependent on nature for its direct operations. So if the ecosystem on which it depends declines or disappears, that company’s operations and profitability would be affected. This can be thought of as the exposure to physical risks in the system.
For example, a company involved in growing pollination-dependent crops would be highly dependent on the ecosystem service of natural pollination.
The studies may underestimate the exposure because they consider only ‘first order dependencies’ and not indirect dependencies through supply chains. The France study found that all companies in the portfolio were at least slightly dependent on ecosystem services, once supply chains are considered.
Companies can also have impacts on nature. This is the equivalent of a company’s ‘carbon footprint’ which gives a measure of a company’s contribution to climate change. However, unlike with climate change, it is difficult to reduce the ‘biodiversity footprint’ to a single metric.
The same studies above identified the following impacts in the:
The metric used in the Netherlands and France studies is mean species abundance (MSA). This gives a measure of the ‘intactness’ of one unit of area compared to its pristine state. Multiplying this by the size of the area affected gives an impact in units of MSA square kilometre. So for the Netherlands study, the accumulated impact of the financial sector was found to be 58,000 MSA square kilometres.
MSA is explained in more detail in appendix 4 of the NGFS-INSPIRE paper. In simple terms, one MSA square kilometre’s impact on biodiversity is like changing one square kilometre of pristine nature into a featureless car park.
The other studies measured impacts in different ways. For example, they considered the amount of lending to companies operating in protected areas or areas that may become protected in the future. This is important because at the Montreal COP15 biodiversity summit in 2022, governments agreed to conserve 30% of the world’s land and oceans by 2030.
The magnitude of impacts on nature can be thought of as a measure of transition risk. That is, companies with larger impacts will be more vulnerable to new regulations, taxes, or fines that aim to mitigate harmful activities. Those companies may also suffer reputational damage.
The NGFS-INSPIRE paper suggests some further ways biodiversity loss could lead to economic impacts.
Severe environment-related events could disrupt food production (for example, a decline in pollinator species or a decline in soil microbiota). Disruption in one country can be enough to put pressure on global markets and cause price spikes, which can feed through to broader-based global inflation. A clear example of this is the war in Ukraine, a country that accounts for 10% of the world’s corn and wheat exports.
Responses to mitigate biodiversity loss (for example, restrictions, quotas, and taxes) could also be inflationary.
Over the longer-term, gradual biodiversity loss could reduce the potential growth rate of an economy. This is sometimes described as reducing the stock of a country’s natural capital.
Countries that are dependent on harmful activities (for example, palm oil or cattle farming responsible for deforestation) could be affected by new global agreements. And countries degrading their natural capital might need to import more food, putting pressure on their balance of payments. These factors may increase the cost of servicing their sovereign debt.
Conversely, countries preserving their natural capital may benefit as global natural resources become scarcer and more valuable. Our next blog explores the potential impact on sovereign debt in more detail.
Various studies over the last 15 years have attempted to put a single figure on the size of the global risk.
A 2008 paper estimated a loss of 7% of global GDP between 2000 and 2050, or $14 trillion, if biodiversity continues to decline as expected. See ‘The Cost of Policy Inaction: The case of not meeting the 2010 biodiversity target’ (5.81 MB PDF).
A 2014 paper quoted $125 trillion a year as the value of global ecosystem services. It estimated a loss of $4.3 to $20.2 trillion a year between 1997 and 2011 due to land use change. See ‘Changes in the global value of ecosystem services’.
A 2020 paper found $44 trillion of economic value generation, or more than half of annual global GDP, is moderately or highly dependent on nature. See ‘Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy’.
It can be seen from the above that different studies have produced vastly different results. This should not be a surprise given the difficulties in putting monetary values on nature’s services. Each study used a different approach, relied on simplifying assumptions, and only considered a subset of all natural services.
But despite these challenges, we can initially conclude that:
In the meantime, we call on actuaries to acknowledge the risks, start building skills, and be receptive to new information and studies in this area. This will allow us to start to raise the risks with clients and colleagues in an informed way.
