The first analysis of its kind has produced an inventory of the risks that nature degradation poses to the UK’s economy and financial sector, and quantified the potential economic costs.
The report, led by the Green Finance Institute, received input from a range of UK scientists and financial experts, UK Government officials and the Financial Conduct Authority.
It benefited from evidence collected as part of the Integrating Finance and Biodiversity (IFB) Programme, coordinated by the UK Centre for Ecology & Hydrology (UKCEH).
Professor Paula Harrison, Professor James Bullock, Dr HyeJin Kim and Dr Mike Perring of UKCEH contributed expertise to a new inventory setting out domestic and international nature-related risks to our economy. These include soil health decline, water shortages, global food security repercussions, zoonotic diseases that pass from animals to humans like bird flu, swine flu and Covid-19, as well as antimicrobial resistance and litigation risks.
Ecologist Dr Perring, one of the authors of the report chapter that set out the risk inventory, says: “Although the dependence of the economy on nature is increasingly recognised and quantified, the risks to financial stability from nature-related degradation are not.
“Crucially, this new report takes account of complex and cascading risks, including from climate change and biodiversity loss, by underpinning its analyses through the use of an innovative nature-related risk inventory.”
The UK is one of the most nature-depleted countries in the world; three quarters of the country has a high level of ecosystem degradation, with risks to financial services and the wider economy as a result. The analysis shows, however, that half of the UK’s nature-related risks to the financial system originate overseas.
As part of the report, an analysis led by the National Institute of Economic and Social Research (NIESR), estimates that deterioration of the natural environment when compounded with climate change could eventually lead to a 12% loss of the UK’s gross domestic product (GDP) within a decade.
In comparison, the financial crisis of 2008 took around 5% off the value of UK GDP, while the Covid-19 pandemic resulted in a 11% reduction in GDP in 2020.
Some sectors face higher levels of nature-related financial risk, such as agriculture, manufacturing and utilities. For example, the agricultural sector faces risks associated with water, climate regulation, soil quality and pollution which could impact food production, while the utilities sector is dependent on surface water for cooling power stations, and any constraint in supplies could impede production and raise energy prices.
The analysis estimates some banks could see reductions of around 5% in the value of their domestic portfolios from nature-related risks.
The report authors say their findings will inform decision-making and provide much-needed impetus to integrate nature-related thinking into the risk analyses carried out by companies, central banks and supervising authorities.
This goes beyond investments that might be called ‘green’. Instead, the report goes to the heart of the financial system, advocating a process known as ‘greening finance’, which involves changing the financial system to explicitly account for financial risks associated with the degradation of nature as well as the opportunities arising from sustainable policies and development.
Dr Perring explains: “The risks need to be acknowledged and addressed to strengthen the UK’s economic resilience. The report provides an opportunity for the UK to be a global leader in proactively managing nature-related risks."
The report, Assessing the Materiality of Nature-Related Financial Risks for the UK, was overseen by a technical team comprising the Environmental Change Institute at the University of Oxford, the University of Reading, the UN Environment Programme World Conservation Monitoring Centre (UNEP-WCMC) and NIESR.
The team makes several recommendations for the public and private sectors, including disclosures of nature-related risks and taking urgent action to meet the targets included within the Global Biodiversity Framework (GBF). The framework commits countries to a number of goals, including halting and reversing nature loss by 2030 as well as increasing the abundance of native wild species to healthy, resilient levels by 2050.
The report is available on the Green Finance Institute website.
A blog post by director Dr Bruce Howard, Direct of the Ecosystems Knowledge Network, and Dr Perring, commenting on the report, has been published on the EKN website.
Further information
The project was supported by the Esmee Fairbairn Foundation, the European Climate Foundation, the Department for Environment Food and Rural Affairs and the Natural Environment Research Council, part of UK Research and Innovation (UKRI).
The Green Finance Institute, University of Oxford, University of Reading, UN Environment Programme World Conservation Monitoring Centre and UKCEH are all partners of the UKRI Integrating Finance and Biodiversity Programme’s Greening Finance for Nature initiative, which seeks to provide data, analytics and evidence to support financial institutions to integrate nature within financial decision making.