UK economy’s nature-related risk to be assessed for the first time

Analysis led by the Green Finance Institute, backed by Defra and the Bank of England, will quantify UK financial and economic risks from exposure to nature degradation

New analysis led by the Green Finance Institute, supported by Defra and the Bank of England, and alongside the UN Environment Programme World Conservation Monitoring Centre and the Universities of Oxford and Reading, will estimate the scale of nature-related financial risks to the UK economy for the first time.

In a report to be published later this year, this first-of-its-kind analysis will reveal the materiality of nature-related financial risks and the potential financial impact of biodiversity loss and ecosystem degradation on UK business and financial institutions. This builds on work carried out by the Banque de France and De Nederlandsche Bank to understand and quantify their portfolio exposure to nature degradation.

The UK economic system depends on the natural world with three-quarters of UK FTSE All-Share firms ‘highly dependent’ on natural capital and resources, including water and soil. Examples of highly dependent sectors include agriculture, forestry, utilities, and mining, which risk facing economic disruption as nature is continuously depleted. The UK’s stock of natural capital assets (upon which benefits are based) were estimated in 2019 to be worth £1.2 trillion.

Understanding the potential financial impact of nature-related risks is fundamental to preventing the further destruction of nature, and creating a resilient economy. These new insights will add to the growing recognition that a reallocation of capital to nature-positive investment is needed in order to support a thriving, sustainable environment, and in turn a sustainable economy.

The analysis will build on the UK Government’s support for the Taskforce on Nature-related Financial Disclosures (TNFD). The TNFD is developing a nature-related risk management and disclosure framework, launching in September, which will enable organisations around the world to report and act on evolving nature-related risks in a credible, clear and consistent way. The Green Finance Institute played a pivotal role in setting up the TNFD and now hosts the global secretariat and convenes the UK National Consultation Group.

Dr Rhian Mari-Thomas OBE, CEO, Green Finance Institute said: “When the costs of neglecting nature are revealed through this analysis, we will be able to see for the first time, the impact this will have on the UK economy, making it clear that conserving and enhancing the natural environment is the only intellectually coherent path to growth.” 

Lord Benyon, Green Finance Minister, said: “A resilient and healthy natural environment is crucial to our economy, which is we are taking urgent action to reverse biodiversity loss and restore nature through our world-leading Environment Act. The private sector has a vital role to play and we are pleased to support this project, which helps UK companies and investors to understand the need to integrate nature into their decision-making processes.”

Baroness Penn, Treasury Lords Minister, said: “The health of the economy and the health of our natural environment are inextricably linked; we cannot have one without the other, as the world-leading Dasgupta Review made clear. This work quantifying nature-related financial risks is an important next step in sustainable economic growth.”

Sarah Breeden, Executive Director, Financial Stability Strategy and Risk and member of the Financial Policy Committee at the Bank of England, said:  “The financial system’s exposure to declines in nature – whether deterioration of air, water or soil quality, deforestation or the depletion of fish stocks – is clear.  But establishing nature-related financial risks is complex and unprecedented. This work – to quantify the cost of nature-related financial risks to the UK – seeks to fill that gap. The Bank looks forward to seeing the project’s findings later this year.”

David Craig, Co-Chair of the Taskforce on Nature-related Financial Disclosures, said: “As the increasing effects of climate change and negative practices degrade our natural systems, it is critical we understand and mitigate financial risks to UK banks and the economy. Complementary to and building on the work of the Taskforce on Nature-related Financial Disclosures, this analysis will help shed light on the reality that our economic system is dependent on nature.”

Technical partners:

Dr Nicola Ranger, Programme Leader, Environmental Change Institute, University of Oxford said: “The risks of climate change and biodiversity loss to our economy are vastly undervalued in global financial markets today. As a result, finance is flowing in the wrong direction – toward activities that, for example, drive deforestation and pollution – putting nature, people and livelihoods at risk. Through this research, and by valuing these risks properly within the financial decisions of banks, pensions funds and insurers, we can not only avoid these irreversible impacts but also begin to mobilise the billions of pounds of financial flows needed to protect and restore biodiversity and our natural environment in the UK and globally”

Corli Pretorius, Deputy Director at UNEP World Conservation Monitoring Centre (UNEP-WCMC) said: “As co-developers of the ENCORE tool, we are excited to be able to apply this knowledge base to the UK economy, to help businesses, financial institutions and policymakers understand their dependencies on nature. It is vital that nature-related dependencies and impacts are transparently assessed and valued. This will provide critical information for business and the financial sector to integrate nature in their decisions for longer-term stability and resilience. ”

Prof. Tom Oliver, Research Dean for Environment at the University of Reading said: “The degradation of our natural environment causes impacts, such as food system disruption from extreme weather and animal-borne disease, that may well produce considerable material risks to financial stability. Understanding these complex environmental risks, which operate through a myriad of secondary effects and are becoming more frequent over time, is critically important and so this is a very timely and exciting project.”

This analysis responds to recommendations made by the Financing UK Nature Recovery Coalition in its 2022 report to increase pressure on UK corporates to reduce negative nature-related impacts and invest in nature positive outcomes. It also follows the work of the Get Nature Positive Campaign, an awareness raising campaign for UK industry that showcases actions UK corporates can take to reduce negative impacts on nature.