The UK is one of the most nature-depleted countries in the world

The deterioration of the UK’s natural environment could lead to an estimated 12% reduction in GDP. This is according to a first-of-its-kind analysis by a team involving the UK’s top researchers, led by IFB Partner, the Green Finance Institute (GFI).

This estimated reduction exceeds previous landmark episodes such as the financial crisis of 2008 (5%), and the Covid-19 pandemic in 2020 (11%).

The analysis behind the figure is described within a new report – Greening Finance for Nature: Assessing the Materiality of Nature-Related Financial Risks for the UK – and it highlights the impact of the degradation of natural ecosystems, both domestically and internationally, on the economy and financial sector in the UK. It also finds that nature-related risks are at least as detrimental to the economy as those from climate risks.  Yet, while the economic costs of climate change are becoming increasingly accepted, the risks and costs posed by nature degradation have not been sufficiently factored into financial and business decision-making.

Nicola Ranger, Director for Greening Finance within the IFB Programme, and the Environmental Change Institute at the University of Oxford said:

“Over the last decade, Central Banks and financial institutions woke up to the risks posed by climate change and we’ve seen meaningful steps to address them, including mandating disclosures, and beginning to shift capital flows toward green sectors and technologies. With this report, we comprehensively demonstrate that risks from environmental degradation and biodiversity loss are at least as severe and urgent, and indeed that if not addressed, will double climate change losses.”

The UK is one of the most nature-depleted countries in the world, with a high level of ecosystem degradation over three quarters of its area. This poses risks to financial services and the wider economy. Furthermore, the report states that half of the UK’s nature-related risks originate overseas.

Within the analysis, a new inventory charts these domestic and international nature-related risks. Many of these are not currently captured in nationwide assessments. The inventory records financial risks arising from the deterioration of nature and biodiversity, including: soil health decline; water shortages; global food security repercussions; zoonotic diseases that pass from animals to humans (such as bird flu, swine flu, and Covid-19); antimicrobial resistance, where bacteria and viruses no longer respond to medicines; as well as transition and litigation risks.

Some sectors in particular face higher levels of nature-related financial risk. These include 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. The utilities sector is dependent on surface water for cooling power stations, and any constraint in water supplies could impede production and raise energy prices.

These impacts on the economy will also have a financial impact on banks and other financial institutions. The analysis estimates that some could see reductions of up to 5% in the value of their domestic portfolios. Noting that these estimates are likely to be conservative, this indicates that nature-related risks will not just impact the economy, but also financial resilience.

The report findings demonstrate the significance of the risks, and present an opportunity for swift action from governments, central banks, regulators and the financial sector to proactively manage nature-related risks. This would position the UK as a global leader in this area. For businesses there are early-mover advantages for those that act to improve and support resilience, particularly within their supply chains.

Lord Benyon, Minister of State at the Department for Environment, Food and Rural Affairs, said:

“Nature underpins the health of our economy, and it is under threat from a global nature crisis. The responsibility to conserve nature lies with all sectors and sections of society, and green finance has a crucial role to play. The findings in this report will help people and institutions across the corporate and finance sectors understand that it is in their own interests to go further and faster for the planet to protect it for future generations.”

The GFI and the technical team make several recommendations for the public and private sectors. These include disclosures of nature-related risks, and taking urgent action to meet the targets included within the Global Biodiversity Framework.

The technical team comprised the Environmental Change Institute at the University of Oxford, the University of Reading, the UN Environment Programme World Conservation Monitoring Centre, and the National Institute of Economic and Social Research together with input from UK Centre & Ecology & Hydrology.

This 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 GFI, University of Oxford, University of Reading, UNEP WCMC, UK Centre for Ecology & Hydrology are all partners to 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.