The economic importance of biodiversity

In most cases, environmentally sustainable economies are associated with low carbon emissions; the goal of being net zero is omnipresent in policy frameworks (e.g., the European Green Deal), political decisions, and the long-term sustainability KPIS of companies. Recently, however, another environmental issue has gained increasing attention from economists, policymakers and businesses: biodiversity. Protecting and restoring biodiversity is one of the six environmental objectives of the EU Taxonomy and the increased importance also translates into ESG ratings and reporting standards for companies.

Biodiversity can be defined as the variety of organisms at the molecular, organismal, species, population, and ecosystem levels. This variety of organisms is on a decline, as the WWF’s Living Planet Report 2022 found, monitored wildlife populations around the world declined by 69% between 1970 and 2018. This decline poses a risk to humanity and global economies as it leads to the destruction of natural capital in terrestrial and marine ecosystems. The World Economic Forum ranks biodiversity loss and ecosystem collapse as one of the major global risks over the 10-year horizon.

Biodiversity is a public good, and the destruction of biodiversity and natural capital affects humanity in a variety of ways, as humanity relies on natural capital for food, medicine, and building materials, among other things. However, this dependence is not properly accounted for, and most economic models do not take into account the negative externalities of biodiversity.

Despite the general neglect of biodiversity in mainstream economics, the World Economic Forum has made a case for biodiversity loss in its second New Nature Economy Report. It estimates that some $44 trillion of global economic value creation is at risk because of its dependence on natural capital and services.

Agriculture is undoubtedly one of the sectors that relies heavily on natural capital, and biodiversity in agricultural products (including indigenous products) ensures a healthy diet rich in micronutrients. A reduction in biodiversity in agriculture leads to less resilient food supply chains which in turn threatens food security, given the increased exposure to extreme weather events.

Furthermore, the pharmaceutical sector depends on biodiversity as well, as mainstream and traditional medicine is derived from or inspired by plants (according to the World Economic Forum, 25% of drugs used in modern medicine are derived from rainforest plants). A loss in biodiversity implies lost opportunities to find derived drugs.

These two sectors are used to illustrate the dependence of our economy on biodiversity and natural capital. However, it is important to note that all sectors depend on natural capital and biodiversity through "hidden dependencies" along the entire supply chain.

Finally, biodiversity and natural capital are material for each business. As mentioned above, biodiversity is gaining more attention in the mainstream, so negative direct or indirect impacts of a company can lead to the loss of customers or entire markets. Transition risks and regulatory changes related to biodiversity can also negatively impact a company's performance. Given that biodiversity and natural capital provide livelihoods - the World Economic Forum estimates that around $125 trillion in value is derived from natural ecosystems each year - the loss of biodiversity is causing disruption to society and therefore to the markets, which also poses a significant risk for companies.

To conclude it is to say that society, industries, and businesses depend on biodiversity in a lot of ways. Internalizing the externality of biodiversity loss through policies and regulations is the right step toward long-term sustainable and prosperous economies.