What’s the economic and financial impact of continuing to degrade nature, locally and globally? That’s the question the UK’s Green Finance Institute (GFI) has been answering over the last 12 months. Its first-of-its kind review quantifies the potential impact of degrading nature on the UK’s economy and financial sector.
In this blog, the first in a series, we outline the GFI’s conclusions. In our second blog, we explain what these conclusions mean for Australia and Aotearoa New Zealand.
What we mean by ‘nature’ in this context
Nature includes living and non-living things (natural capital) that support economic activities.
Conclusions from the GFI’s UK research
Read the report here: Assessing the Materiality of Nature-related Financial Risks for the UK (April 2024)
1. Nature-related risks are as harmful as risks related to climate change. They are already slowing UK growth and productivity. In fact, the Institute estimates that nature loss could lead to a 12% drop in GDP in the future – much worse than the 2008 Global Financial Crisis or Covid-19.
2. The report raises the alarm. The UK needs to transition its economic system urgently to one that values and invests in the natural environment. The report sets out opportunities and recommendations for swift actions that government, central banks, regulators and the financial sector need to take to respond to nature-related risks and harness opportunities.
3. The annual value of nature in the UK was estimated to be £35.7 billion in 2020. The UK economy centres on financial services, so this value relates mainly to tourism, recreation and the health benefits of recreation.
4. There are 29 major risks for the UK. The most likely and highest impact are zoonotic diseases (similar to Covid-19), antimicrobial resistance, a decline in soil health and food insecurity. Potential loss of sectoral production is also considered to be very high for agriculture, and high for manufacturing and services sectors too.
5. There are two major nature-related dependencies. These are mass stabilisation (making land more stable) and erosion control. These are ‘umbrella’ terms for the risks and related impacts of land slips, floods, loss of usable land, soil salination and degraded soil health. In the UK every sector depends on nature to develop infrastructure and buildings. Every UK citizen depends on the built environment too. Homes are expected to fall in value by 4-5% in the coming decade due to physical nature-related risks alone.
6. Fifty percent of the UK’s nature-related risks come from overseas. This indicates two things:
- The UK central bank and financial institutions will be scrutinising nature-related risks from overseas (including Australia and Aotearoa New Zealand) and seeking to mitigate them
- The scale of nature risks is both domestic and international.
7. Australia and and Aotearoa New Zealand are sources of ‘vulnerable’ imported goods. The US is likely to respond:
- with more stringent environmental regulations and taxes for imported products (our 'Down Under' exports such as meat)
- by looking to diversify sources of materials (e.g. minerals) to reduce supply chain risk.
Note: the New Zealand-European Union Free Trade Agreement (in force from 1 May 2024) exposes New Zealand businesses to EU legislation such as deforestation law and the Carbon Border Adjustment Mechanism.
8. Central banks and financial institutions are likely to expect nature-related financial disclosures. This will help them obtain more information on nature-related issues up and down value chains. Businesses will need to provide disclosures that align with the Taskforce for Nature-related Financial Disclosures (TNFD) if this occurs. The new Free Trade Agreement (above) makes this even more likely for New Zealand businesses. Our Need to Know: Nature-related Financial Disclosures explains what these disclosures involve.
9. Chronic global nature risks and impacts are likely to ripple across many regions. They will result in rising risk premiums on transactions (e.g. a higher cost of capital), less sustainable debt, a more vulnerable financial sector and greater food insecurity.
10. Different regions will experience different effects. The report provides a likely outlook in the UK and globally by analysing realistic future scenarios. For Asia-Pacific (including Australia and Aotearoa New Zealand), the report expects the risk of invasive species and pest attacks to rise. These risks have sizeable impacts on concentrated supply chains, cause global shortages in core products and increase costs.
For south-west Australia, the report highlights a risk of increased soil salination in the major wheat belt, caused by extracting too much water and removing too much vegetation. The result: less productive cereal crops.
The GFI’s report packs a punch. In our next blog we explore what these findings mean for businesses in Australia and Aotearoa New Zealand. We explain what your business needs to do to understand your relationship with nature and manage the risks and opportunities involved.