Earlier this month a report from UK think tank the Institute for Public Policy Research (IPPR), dramatically entitled This is a Crisis, warned that human impacts on the planet’s ecosystems have reached a critical point, creating a real risk of environmental breakdown.
One of the key messages of the report that should resonate with IR professionals is that negative impacts go beyond just climate change and encompass corporate impact on wider natural systems, including water stress, soil degradation and biodiversity loss.
Since the 1970s, the number of floods across the world has increased by 15 times, extreme temperature events by 20 times, and wildfires sevenfold. More than 75 percent of the Earth’s land is substantially degraded. Meanwhile, a separate scientific review warns that the total mass of insects is falling by a precipitous 2.5 percent a year, suggesting they could practically vanish within a century.
The degradation of nature has created a host of new risks for business, with the IPPR report authors warning of a ‘runaway collapse’ in which economic, social and political shocks cascade through the globalized system – as happened in the wake of the global financial crisis of 2007/2008.
Continued investment in fossil fuels, for example, which must remain unexploited to avoid climate breakdown, could expose investors to the risks of the falling value of high-carbon assets that must occur if carbon budgets are to be met.
While climate change continues to dominate much of the responsible investment discourse, investors must start considering how companies are managing their risks and impacts on the wider natural world.
Analysis of the FTSE 100 using data available on ENCORE, a new tool from the Natural Capital Finance Alliance to help the finance sector understand its dependence on nature, finds that in 13 of the 18 sectors that make up the index, a total of $1.6 tn in net market capitalization is associated with production processes that have high (or very high) material dependence on nature.
Natural capital risks
The research finds that the big three ecosystem services underpinning the global economy are water provision, climate regulation and flood protection. ENCORE’s data also highlights the sectors most exposed to natural capital risks: agriculture, forest products, aquaculture and fisheries.
Take fisheries: estimates suggest current seafood production may have to double by 2050 to meet demand. At the same time, 87 percent of global fisheries are partly or fully exploited, trawler catches are plummeting and populations of some species, such as bluefin tuna, have been reduced to 2 percent to 3 percent of their previous levels in less than a century.[link:]
This blue economy may be worth trillions of dollars, but it poses a potential investment risk for financial institutions that do not have robust requirements for the companies they finance, including transparency and disclosure on progress toward sustainability targets, clear identification of risks and dependencies, and strong policies on fishing methods and farm management.
Aside from fisheries, ENCORE shows how production processes across diverse sectors rely directly on nature – metal processing, for example, and its reliance on groundwater provision, the oil & gas sector’s dependence on bio-remediation (nature’s armies of microbes that clean up contaminated soil and groundwater) or food crop production and its reliance on pollination. The UN’s Food and Agriculture Organization has found that up to $570 bn worth of annual food production relies on direct contributions from natural pollinators.
This IPPR report is a wake-up call to business on the need to face head-on the impact of accelerating environmental change. Managing environmental risk is not only about emissions reductions; to safeguard their operations and portfolios, companies will also require robust mechanisms to explore, identify and manage the risks environmental degradation poses.
Niki Mardas is executive director of Global Canopy and a member of the Natural Capital Finance Alliance steering committee
