Chapter 2

The connection between biodiversity and systemic financial risks

Garry Peterson and Megan Meacham 

Economic activity is unweaving the web of life. Finance is a major force directing this economic activity.  This chapter explains how biodiversity sustains economics and finance, and how losses of biodiversity threaten the viability and stability of economic activities. The chapter also explores current activities from biodiversity science, economics and regulation that are being advanced to address these risks.

The Essential Role of Biodiversity in Finance

Finance, economies, and human societies are all embedded within the biosphere (Folke et al., 2016; Dasgupta, 2019). The living world is the ultimate source of human well-being. However, sustainability researchers recognize that the increase in scale, connectivity and speed of the global economy is reshaping the biosphere, and its capacity to reliably support humanity (IPBES, 2019; Nystrom et al., 2018).  The planetary boundaries framework focuses on defining safe limits to these modifications (Rockström et al., 2009) and recently there have been attempts to define just limits (Rockström et al., 2023).  

Figure 1. The economy and society as embedded within the biosphere, as intertwined parts of the planet. The biosphere serves as the foundation upon which prosperity and development ultimately rest.  From Folke et al. (2016). Creative commons figure. 

International science policy assessments have documented how human existence and quality of life depend on nature in increasing detail.  The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) described how nature plays a critical role in providing food, energy, medicines and a variety of materials fundamental for people’s physical well-being, social support, and cultural identity.  Ecosystems contribute to fundamental functions like pollination, carbon sequestration, water purification, and climate regulation. These ecosystem services have monetary value and are vital for various industries, including agriculture, pharmaceuticals, and tourism (TEEB, 2010). Genetic diversity, an essential component of biodiversity, is crucial for agriculture and medicine, playing a pivotal role in the creation of resilient and high-yielding crops, as well as in drug development (Heywood, 1995).  Marine and terrestrial ecosystems are the key sinks for human caused carbon emissions, and currently store about 60% of human caused emissions (Rockström et al., 2021). 

Biodiversity loss is changing nature by reducing the supply of ecosystem services, reducing the resilience of ecosystems, and reducing the ability of nature to adapt to change. Biodiversity loss undermines key aspects of human wellbeing: food security, water quality, health, and security. By reducing the productivity of agricultural systems, biodiversity loss reduces access to food for millions of people who depend on crops and livestock for their livelihoods. By impairing the ability of ecosystems to provide clean water, biodiversity loss reduces access to safe drinking water for billions of people who rely on natural sources. By creating new opportunities for zoonotic spread of disease, biodiversity loss makes people more vulnerable to infection by exposing them to novel pathogens and vectors. By destabilizing ecosystems and making them more variable and more likely to experience regime shifts, biodiversity loss reduces the predictability and stability of the services that ecosystems provide. Furthermore, by making ecosystems less resilient to extreme weather events, such as floods, droughts, and wildfires, biodiversity loss increases the risk of disasters that can destroy homes, infrastructure, and livelihoods. 

The benefits that nature provides people are fundamentally irreplaceable (Dasgupta, 2019).  Technology and infrastructure can enhance and replace some of the benefits that people receive from nature, but most of them are more expensive than maintaining nature, incur high future costs, and fail to provide multiple co-benefits. For example, the storm surge and coastal protection can be provided by seawalls and dikes, rather than mangroves. However, technology and infrastructure are also costly, often difficult to maintain, and do not provide other ecological benefits such as spawning habitat, carbon sinks. Nature’s ecological and evolutionary processes maintain these capacities in the living world and provide nature and people with the capacity to adapt to future changes in the living and non-living world.

Finance’s Impact on Biodiversity and Systemic Financial Risks

The financial sector steers economic activity by providing investment, loans, and insurance. The financial system could be funding the restoration and revival of biodiversity, but it currently does not. Instead, it promotes the expansion of activities that are simplifying ecosystems and driving the loss of biodiversity (IPBES, 2019).  Not only are many of these activities bad investments, but these activities can also produce new types of risks and shocks (Dasgupta, 2019). Understanding both the direct and systemic economics risks arising from biodiversity loss becomes crucial for economic resilience and sustainable development.

Nature loss does not only increase the likelihood of extreme events which impact society, it also reduces the capacity of nature and society to cope with and respond to these shocks.  While it is difficult to estimate the exact size of economic losses which will result from an eroded natural environment, it is not difficult to estimate some possibilities. For example, nature loss is increasing the risk of zoonotic diseases. The emergence of a disease with greater impacts than the COVID pandemic could disrupt global supply chains, as well as reduce consumer and business activity. The economic toll of the COVID-19 pandemic for the U.S. economy is estimated to reach US$14 trillion by the end of 2023 (Walmsley et al 2023). These shocks could lead to banking, debt, and currency crises, and the interconnectivity of global financial networks could amplify the effects, transmitting risk from vulnerable areas to other areas. For example, US$4.3 billion was spent preventing and treating malaria in 2016 (Haakenstad et al 2019). More locally, conversion of natural ecosystems, and in particular the loss of wetlands in urban watersheds could lead to severe urban flooding, leading to substantial property and infrastructure damage, as well as business interruptions. If such losses overwhelm local insurance mechanisms, the financial consequences of such an event could trigger sectoral, local, and national crises, particularly in the banking and debt sectors, highlighting the vulnerability of urban infrastructure to ecological changes and the systemic risks posed to financial institutions that finance and insure such assets.

Many types of economic development are based on subsidies which promote activities that decrease the public benefits from nature (Barbier et al., 2022). For example, the World Bank recently estimated that continued land clearing in Brazil could cost the country US$317 billion annually.  While public economic benefits from ecological conservation are estimated to be seven times as valuable as the economic benefits from agriculture, logging, and mining (Hanusch, 2023), the beneficiaries from these activities are different.

Furthermore, the destabilization of ecosystems can produce novel types of shocks or risks for economic actors and the financial system. For example, agriculture is a major sector in Brazil’s economy and a key driver of Amazonian deforestation. Amazonian deforestation appears to be reducing rainfall and water availability in ways that are threatening agriculture, water for cities and hydroelectric power generation (Keys et al., 2019a; Leite-Filho, 2021), thus resulting in new material financial risks (see Chapter 6).  By destabilizing the biosphere, economic activity can produce new types of so called “Anthropocene risks” that in turn destabilize economic activity but are difficult to forecast and quantify (Keys et al., 2019b; Rising et al., 2022). This vulnerability can trigger cascading effects through the economy, leading to widespread instability, affecting businesses, markets, and livelihoods (Henderson, 2021).

Realization of the adverse impacts of biodiversity loss has led to the emergence of sustainable investment movements. There is increasing understanding of the need for both greening finance, to reduce harm, and financing green, to strategically invest in solutions that enhance biodiversity (World Bank, 2020). Reducing harm involves minimizing detrimental impacts on biodiversity, acknowledging its foundational role in ecosystem services. Financing green entails investing in innovative approaches that align with nature-positive production of goods and services, ultimately contributing to halting and reversing nature loss (Locke et al., 2020).

Going Forward

The recent Kunming-Montreal Global Biodiversity Framework (GBF) was established as a key step towards stopping biodiversity loss. This framework encompasses 23 global targets to be completed by 2030, with the ultimate goal of living in harmony with nature by 2050. Among these targets, the “30X30” agreement, aiming to protect 30% of land and seas, is a significant step in addressing the main driver of biodiversity loss—land-use change (CBD, 2020).  The framework emphasizes the need to shift incentives in global finance and business towards nature-positive actions. It also highlights the importance of considering the perspectives and interests of Indigenous peoples and local communities, promoting a pluralistic approach to biodiversity conservation (IPBES, 2019).  Achieving the targets outlined in the GBF is a monumental challenge to the status-quo, and while political awareness and international cooperation around nature are historically high, the resources being committed to this goal are still far too low (Deutz et al., 2020).

The Dasgupta Review (Dasgupta, 2019) suggests that businesses and financial institutions should be required to disclose their dependence and impact on nature.  The aim of this increased transparency allows investors and shareholders to assess the nature-related risks in their portfolios, as well as consumers and regulators to assess the activities of companies and investors.  There is substantial progress towards this goal. The GBF includes target 15, which requires governments to ensure that large and transnational companies disclose “their risks, dependencies and impacts on biodiversity”. There is a wider variety of initiatives in Europe, the US, and Japan to track corporate impact, along with the recommendations from the Taskforce on Nature-Related Financial Disclosures that can be expected to continue to develop and be implemented in some form.

Achieving all of these goals will require substantial change in how the world operates and this will require not only biodiversity science, but new accounting systems, regulations and business practices. Creating effective standards will require collaboration between all these fields to implement, monitor, and evaluate, as well as development of new operating practices and standards over time. Striking a balance that promotes sustainable financial practices and nurtures biodiversity is a shared responsibility, requiring collective efforts from stakeholders across sectors. 

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Chapter 2

Finance and Our Living Planet

The financial sector is not only connected to climate change through its investments. The decisions made by financial institutions also impact our living planet: the forests, the lakes, the coral reefs and other ecosystems on land and in the oceans – as well as the people who depend on them. 

If unguided, this interconnectivity is a threat. Harnessed, it presents an opportunity for investors to accelerate action for a stable climate system, and for the sustainable and equitable stewardship of the Amazon rainforest, the ocean and other key biomes.

Investments are key to a transition to a net-zero world, climate stability and biosphere stewardship. The institutions that mediate these investments are central to our ability to shift our economies in a direction that promotes a thriving planet, both on land and in the oceans.

Promising signs include a total of US$632 billion climate-related financial investment worldwide, and almost 40% of all European Union–domiciled funds marketed as “sustainable”.

The growing interest in “green,” “net zero” or “climate friendly” investments is, however, not yet sufficient to help achieve the Paris Agreement or the ambitions of the Sustainable Development Goals (SDGs).

Investing in climate stability and global health

Investors providing equity, loans and bonds to companies contributing to deforestation can have major impacts on both climate stability and human health. New data about the most important financial institutions in the world show one of the main culprits: investments in industries that undermine the resilience of key biomes. For example, many banks and pension funds have significant ownership in the soy and beef sectors connected to the stability of the whole Amazon rainforest, which in turn is critical for biodiversity conservation, water supplies and global climate stability.

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New research also shows clear and increased risks for domino effects among climate change, ecosystem degradation and the financial sector.

The ocean finance gap

For the world’s ocean ecosystems, finance could also play a key role in assisting transformation towards sustainability. While the finance sector could help bridge a vast “ocean finance gap” by unlocking capital for a resilient ocean economy for all, less than 1% (US$13 billion) of the total monetary value of the ocean has so far been invested in sustainable projects.

The vast majority of investments have gone to large-scale activities that counter the delivery of the Sustainable Development Goals.

Through technological innovation and increasing human demand for food, energy, material and space, ocean-based industries are growing at an unprecedented pace. A focus on who and what are financing this “Blue Acceleration” can unlock powerful leverage points to redirect corporate finance to support implementation of the 2030 Agenda, including the SDGs.

In fact, SDG 14 (“Life Below Water”) remains the least funded goal. While an estimated US $175 billion per year is needed to fund SDG 14, it received just below US $10 billion in total over the period 2015–2019.

The new planetary reality, with combined financial, climatic and ecological risks, changes the way systemic risks should be understood and dealt with in the financial sector. Addressing this will require investors to engage in new ways and on new topics. It will also require new methods for translating climate risks, including physical, transition and liability risks, into actionable information for the finance sector.

The influence and responsibility of financial actors to contribute to a transformation towards a just and safe future for all has never been clearer.