How finance can be part of the solution to the world’s biodiversity crisis

More than half of the world’s total GDP is at least moderately dependent on nature. Yet arguably, there is no economy (or life) without nature. A quarter of animal and planet species are now threatened, and 14 out of 18 key ecosystem services – including fertile soils to grow food, flood and disease control and regulation of air and water pollution – are in decline.

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These ecosystem services are essential and have no easy substitutes. Despite this, almost US$7 trillion (£5.4 trillion) per year is spent by governments and the private sector on subsidies and economic activities that have a negative impact on nature – including intensive agriculture and fossil-fuel subsidies. This compares to only US$200 billion that is spent on nature-based solutions (just a third of what is estimated to be needed).

Although the biodiversity crisis has often been overshadowed by climate change on the global stage, the tide is turning. In 2022, the Kunming-Montreal global biodiversity framework was adopted with its overarching goal to halt and reverse biodiversity loss by 2030.

At the end of October 2024, the signatories of the framework will again come together at the UN’s Cop16 biodiversity conference in Cali, Colombia, to negotiate the implementation of their targets. To make progress towards these goals, Cop16 aims to align finance with the framework; effectively ensuring finance is part of the solution rather than the problem.

To do this, the flow of finance will need to be redirected. A central lever in this is the pricing of risk. Financial institutions face significant risk, both from the degradation of ecosystem services (physical risks) and the social responses to degradation, including regulation and changing consumer demand (transition risks). Yet these risks are not fully priced into financial decisions.

On top of this, corporations do not disclose their nature-related risks, dependencies and impacts, making it difficult for financial institutions to understand the implications of their investments. Together, this means that finance continues to flow unhindered into riskier activities.

Central banks are now starting to highlight risks from nature to financial institutions and to explore the areas where these risks manifest in the financial system.

The financial risks are real

Earlier this year, we published the first study of the seriousness of nature-related financial risks.

We found that, for the UK, nature-related shocks could cause a 6% decline in GDP by 2030 under scenarios such as soil health decline or water scarcity putting pressure on global supply chains. And there could be a drop in GDP of more than 12% in the scenario of an antimicrobial resistance or pandemic shock, driven by increased human-wildlife interaction due to habitat loss and deforestation.

These results are equal to or even greater than the UK’s 6% decrease in GDP after the 2008 financial crisis and 9.7% during the 2020 COVID lockdowns.

We also found that nature-related financial risks were of a similar scale to climate-related risks. Nature loss and climate change occur in parallel, amplify and compound each other. As such, it is essential that solutions look to solve both challenges simultaneously. After all, what is the point of having a cooler planet that is no longer livable?

Of its 23 targets for 2030, the GBF includes two goals that specifically address finance. Target 18 aims to reduce incentives for financial flows that damage nature by at least US$500 billion per year and scale up incentives for nature-positive financial flows. And target 19 aims to mobilise US$200 billion per year for restoring and protecting nature, including at least US$30 billion from international finance flowing from developed to developing countries. A further target, target 15, calls for the disclosure of nature-related risks, dependencies and impacts by firms.

So, what do we need from Cop16 to pull the financial risk lever?

First, there must be international recognition that the long-term, widespread and often irreversible risks of the biodiversity crisis are not being priced by the financial system, despite progress on the integration of climate risks. This can cause a buildup of systemic risks and lead to financial instability; as such, there must be a global consensus that central banks play a key role in taking proactive measures to manage this.

Second, at the individual, corporate and financial institution level, firms must manage and disclose their nature-related financial risks, alongside their climate risks.

Third, similar to transition finance for net zero, financial institutions must begin to engage actively with clients to explore opportunities to support their transition towards more nature-positive activities and reflect this within their transition plans.

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Emma O'Donnell, Research Assistant, Environmental Change Institute and PhD Candidate, Nature-based Solutions Initiative, University of Oxford; Jimena Alvarez, Lead, Greening Finance for Nature, Global Finance and Economy Group, Environmental Change Institute, University of Oxford, and Nicola Ranger, Director and Senior Research Fellow, Global Finance Group, Environmental Change Institute, University of Oxford

This article is republished from The Conversation under a Creative Commons license. Read the original article.