Why are the nature risks to our economy being ignored?

This blog outlines the recent findings from the Green Finance Institute (GFI) on the impact of nature degradation on the UK economy. We question why nature risks are not being assessed by our economic and financial institutions.

GFI report reveals the impact of nature's decline on UK economy

The Green Finance Institute's report published this week made headlines across the media as the impact of nature destruction on the UK economic outlook was made clear.

The evidence continues to mount that our economic system needs to change—and fast . Risks to our economy from nature degradation are not being addressed by our institutions or the financial sector.

Nature risks classified for the first time

The GFI report is unique in that it's the first time nature risks have been classified for their likelihood and impact on the UK economy. (The challenge of measuring and quantifying the environment has long been an obstacle .)

Of the 29 risks assessed in the study, the highest likelihood and impact risks to the UK economy included soil health decline, reduced ability to control diseases (antimicrobial resistance (AMR )), increasing prevalence of diseases from other animals (zoonotic diseases ), and global food security repercussions. Of these risks, 50% originate from overseas through supply chains and financial exposures.

?The GFI study took three future scenarios (domestic-driven degradation, international-driven degradation, and an AMR pandemic event) and assessed them against these risks. In doing so, they concluded that continued deterioration of the UK’s natural environment could slow economic growth and result in GDP being 6% to 12% lower than otherwise by the 2030s.

Continued deterioration of the UK’s natural environment could slow economic growth and result in GDP being 6% to 12% lower than otherwise by the 2030s.

To put this in context, this is a greater impact compared to the Global Financial Crisis when UK GDP fell by around 5% over 2009, and at the higher range, greater than the impact of the COVID-19 pandemic, which caused GDP to fall by 11% over 2020.

The impact of nature degradation is overwhelming.

The impact of nature degradation is overwhelming

The GFI report is the latest evidence that points to our reliance on nature for our economic wellbeing, and the perils of ignoring its degradation.

The UK Treasury-commissioned Dasgupta Review of the Economics of Biodiversity emphasised that our economy is embedded in nature and that investing in nature is vital to sustain our economy in the long term. The State of Nature report highlights that the UK has experienced a significant loss of biodiversity, leaving the UK in the bottom 10% of countries globally for biodiversity health.

?The World Economic Forum estimates that over half of global GDP—$44 trillion—is threatened by nature loss [1 ], and their last Global Risk Report highlighted this as one of the top risks facing the global economy in the next 10 years. The 英国伦敦政治经济学院 concluded that there is a real risk of financial instability due to nature risks [2 ].

?Last year, BloombergNEF highlighted that the financial costs to sustainably manage biodiversity and maintain ecosystems ‘pales in comparison to the anticipated economic cost of biodiversity loss by the end of the decade’[3 ].

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It's time for change

Given the overwhelming evidence, there is little doubt that nature risks need to be fully embedded in our policy framework and factored into the decision-making of our economic and financial institutions. Ignoring these risks would unnecessarily jeopardise our economic fortunes.

Bi-annually, the Office for Budget Responsibility (OBR) issues economic forecasts, and these are relied upon as the authoritative analysis of the UK economic outlook. We need to see forecasts that properly account for nature risks; currently, they do not.

Every government Budget and Spending Review must clearly set out how nature risks have been assessed and what is being done to address them. Fiscal (tax and spending) policy must give priority to delivering the necessary public and private investment in nature.

Economic shocks caused by nature degradation may increase prices in the short term, resulting in inflation and monetary policy responses by central banks. The Bank of England needs to show how it is managing and reducing nature-related risks. Their forecasts have been under scrutiny and still do not properly account for nature in the way the GFI report clearly highlights is necessary.

Our financial institutions can and should be required by policymakers to do more. Measuring biodiversity impacts was found to be absent in most of the 65 of the world’s largest insurers, a finding from the recent ShareAction ‘Sharing Disasters ’ report. Insurance plays a crucial role in transferring and spreading risk, protecting organisations and people.

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What now?

The evidence is conclusive. We cannot afford to ignore the risks of nature loss to our economic prosperity any longer. The GFI report has shown that the impact of these risks on the economy can be assessed.

We challenge policymakers to account for and address them urgently.

- Jenna Coull, Principal Economist, RSPB