By Nick Faull ,
Head of Climate and Sustainability Risk
09/06/2022 · 8-minute read
Many people in business understandably find it difficult to connect the dots between the superficially disparate worlds of nature and finance.
However, the truth is that the global economy is not just connected to nature, it relies on it. Indeed, according to a study by the World Economic Forum (WEF), more than half the world’s economic output (an estimated US$44 trillion) is either highly or moderately dependent on nature. You can see connections between business and nature everywhere, from the food and agricultural industries that rely on healthy and abundant crops, livestock, and well-stocked oceans, to the construction, manufacturing, and clothing companies that need timber, cotton, and other natural materials to make their products. All these sectors and more rely on either the direct extraction of natural resources or the provision of “ecosystem services” that are supported by the environment, such as healthy soils, clean water, pollination, and a stable climate.
Despite this profound and complex relationship between the natural and corporate worlds, many companies are still failing to adequately account for the nature-related risks and opportunities they face. And with investors, lenders, and regulators all pushing for greater transparency in how nature-related risks might affect economic output, it is increasingly important for risk managers to gain a deeper understanding of the role nature plays in how businesses operate.
Nature loss is an urgent and serious problem. Accelerated loss of biodiversity and the collapse of natural ecosystems were identified by the WEF’s 2020 Global Risks Report as among the five biggest threats facing humanity over the next 10 years. Major human-caused threats to nature include climate change; the introduction of invasive species; changes in land use, such as cutting down rainforests for agriculture; the overexploitation of natural resources, such as overfishing; and the pollution of the land, sea, and air.
These threats create a wide range of nature-related business risks that can be grouped in the following three categories:
It is also important to consider that apparently isolated incidents of biodiversity loss can still cause far-reaching environmental and economic problems. For example, a decline in the local bee population could, thanks to bees’ important role as pollinators, significantly reduce crop yields. This would obviously impact the agricultural sector first and foremost. But it could also have a knock-on effect on downstream industries, such as textiles and hospitality, that rely on agricultural output.
The common goal for both environmentalists and businesses is therefore to create a “nature-positive economy” in which the public and private sectors work together to nurture the world’s natural capital and the priceless ecosystems it supports. So, how can this be achieved? By utilizing the decades of environmental regulation and protections already in existence globally, the challenge is to create a coordinated global approach to encourage companies everywhere to operate in a more nature-positive way.
One global initiative of this kind is the Taskforce on Nature-related Financial Disclosures (TNFD), which recently released a trial beta framework to help businesses factor nature-related risks into their financial and strategic decisions. Several companies are now piloting the TNFD’s LEAP process, which advises them to:
Protecting nature was also a major theme of last year’s COP26 climate conference in Glasgow, Scotland, leading to significant new financial and political initiatives to reverse land degradation and forest loss by 2030. Similar commitments could be agreed following the UN Biodiversity Conference (COP15) in Montreal, Canada in December 2022. The 2022 Davos meeting also placed valuing nature high on the agenda.
After scientists have scoped out the problem and politicians have begun setting out a regulatory framework, the insurance sector will have an important role to play in analyzing and mitigating nature-related risks. Various forms of environmental insurance are already in place to redress the loss of natural resources or biodiversity damage. The growing awareness of nature is likely to drive further innovation. This could include parametric insurance products, through which insurance payouts are tied to the abundance of a particular natural asset. Alternatively, improved insurance terms could become available in locations where nature-based solutions contribute to environmental resilience — such as mangrove forests (which both support biodiversity and are natural carbon sinks) make a coastal region more resilient to inundation risk.
Following the extensive work many in and around the insurance sector have already done to model the impacts of climate change, such as extreme weather and other natural disasters, there is already a huge variety of data and analytics available to assess nature-related risks. These include satellite imagery to monitor environmental degradation and tools that model supply-chain risks based on natural resources. One important emerging trend will be the integration of these two approaches, so that a better understanding of the role nature plays in regulating climate goes hand in hand with increased insight on how climate risks impact on nature.
These developments are encouraging, but they remain the first steps of a long journey. For instance, although more than 20% of the world’s largest companies have committed to reducing their carbon emissions to net-zero, most don’t yet recognize the role that nature will play in achieving that goal.
Thankfully, awareness is growing. If governments and business, including the insurance sector take action, the phrase “nature-positive economy” will soon become as familiar in business circles as “net-zero emissions”.