Damage to the natural environment is slowing the UK economy and could put a larger dent in economic output than was seen during the 2008 financial crisis or pandemic lockdowns.
Sectors such as agriculture, utilities and manufacturing are highlighted as facing higher levels of nature-related financial risk, while some banks could see 4-5% reductions in the value of their domestic portfolios.
This is according to research from the Green Finance Institute (GFI) working with researchers and economists from the universities of Oxford and Reading, the National Institute of Economic and Social Research (NIESR) and the UN.
The first-of-its-kind analysis quantified the impact on the UK’s economy and financial sector from the degradation of nature in the UK and overseas.
Deterioration of the UK’s natural environment in combination with climate change could result in UK gross domestic product being 8% lower than it would otherwise by 2030, or by 12% lower due to a scenario involving an antimicrobial resistance-pandemic scenario, according to the report.
In comparison, the global financial crisis of 2008 took around 5% off UK GDP, while in 2020 the impact of Covid-19 was around 11%.
While the economic costs of climate change are becoming increasingly accepted, the GFI said the risks posed by nature degradation are material and are not being sufficiently factored into financial and business decision-making.
“This is leaving the economy and financial sector exposed, while these risks continue to rise unchecked,” the report said.
Although the UK is one of the most nature-depleted countries in the world, the GFI analysis shows that half of its nature-related financial risks originate overseas.
Financial risks arising from the deterioration of nature and biodiversity include declines in soil health, water shortages, food security, antimicrobial resistance, litigation risks, and zoonotic diseases that pass from animals to humans like bird flu, swine flu and Covid.
Highlighting the most higher-risk sectors, the report said the agricultural sector faces risks associated with water, climate regulation, soil quality, and pollution which could impact food production; while in the utilities sector, power companies are dependent on surface water for cooling power stations, while any constraint in water supplies could impede production and raise energy prices as was seen in France last year.
“These impacts on the real economy will also have a material financial impact on banks and other financial institutions,” the report said.
The estimate that banks could see portfolio reductions of around 4-5% in some cases, which the GFI said is likely to be conservative, indicating that nature-related risk will not just impact the economy, but potentially financial resilience.
Several recommendations were made for governments and the private sector, including forcing disclosures of nature-related risks and taking urgent action to meet the targets included within the Global Biodiversity Framework (GBF).
Helen Avery, the GFI’s director of nature programmes and author of the report, said: “The erosion of natural capital generates significant and long-term risks to society, our economy and, therefore to financial institutions and potentially our financial resilience.
“This is the first time the material risk posed by nature degradation to the UK economy and financial stability has been comprehensively assessed. Evidencing this material risk is a vital step towards transitioning our economic and financial system to one that values and invests in the natural environment.”
Lord Benyon, minister of state at the Department for Environment, Food and Rural Affairs, said the findings in this report “will help people and institutions across the corporate and finance sectors understand that it is in their own interests to go further and faster for the planet to protect it for future generations.”
