Time to align economic practice with ecological reality: the critical need to include nature in macroeconomic models

The macroeconomic frameworks at the centre of economic governance were developed for a world in which nature was assumed to be abundant, stable and external to economic activity: that assumption no longer holds. As a major new global assessment of business and biodiversity reveals serious nature-related macroeconomic risks, Nicola Ranger, Tom Tayler, Emma O’Donnell and Carlo Pasqua examine the issues and call for economic practice to align with ecological reality.

In February, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) launched its Business and Biodiversity Assessment. This sobering report highlights how failure to integrate nature’s value into economic and financial systems is accelerating degradation and increasing systemic risk – yet nature underpins all economic activity.

A recent workshop hosted by LSE reached a closely aligned conclusion from a macroeconomic perspective. Convened by Professor Nicola Ranger, we heard from Professor Gretchen Daily (Stanford University) and Professor Sir Partha Dasgupta (Cambridge University), plus 35 leading experts from academia, government, and international finance. The consensus was clear: unless nature is integrated into macroeconomic models, economic decision-making will continue to rely on incomplete – and potentially misleading – foundations. These models and frameworks inform national budgets, IMF surveillance, World Bank country diagnostics, debt sustainability analysis, monetary policy, investment planning, and sovereign risk assessments. But they no longer reflect the reality of an increasingly nature-depleted world and require reform.

Nature as an economic asset

Nature is not separate from the economy. It is the enabling environment within which economic activity takes place. Ecosystems provide water regulation, soil fertility, pollination, climate stability, coastal protection, and other services that underpin productivity, resilience, and long-term growth.

When ecosystems degrade, the effects are macroeconomic. Agricultural output declines. Infrastructure becomes more vulnerable. Water crises threaten industry and supply chains. Heat and air pollution reduce labour productivity. Public spending rises as disaster costs spiral. Financial risk increases. Growth trajectories shift.

Yet in most macroeconomic models, nature is either absent or treated through parallel systems, in the form of satellite accounts or environmental dashboards, that remain disconnected from core fiscal and growth projections. This structural separation allows economies to appear to grow while eroding their own asset base.

The GDP limitation – and why IPBES is right to highlight it

Gross domestic product (GDP) measures flows of economic activity, not changes in the stocks of assets that support those flows. Forests can be cleared, fisheries depleted and soils degraded, and GDP may still rise. From a narrow accounting perspective, this looks like progress but from a wealth perspective, it may represent asset liquidation.

IPBES identifies a focus on GDP growth without integrating biodiversity and ecosystem values as a structural driver of nature loss. Similarly, the UN Secretary General recently highlighted the need to move beyond GDP as a measure of human progress and wellbeing when nature degradation, through actions such as  deforestation or overfishing, nonetheless creates GDP. The LSE-hosted workshop reinforced this point. When macroeconomic systems prioritise short-term output without accounting for natural capital depreciation, they embed distorted incentives: extraction appears economically rational; fiscal projections become overly optimistic; risks linked to ecosystem degradation are understated; and preventive and restorative investments appear less attractive than they are.

For institutions concerned with growth quality, fiscal sustainability and financial stability, this is not a marginal environmental issue: it is a macroeconomic blind spot.

A macro-critical issue for major institutions and investors

Institutions such as Ministries of Finance, central banks, the international financial institutions (IFIs), and long-term investors focus on issues that are macro-critical – those that materially affect growth, fiscal space, debt sustainability, stability, and asset performance.

The workshop concluded that nature-related risks and opportunities increasingly meet the threshold to be considered macro-critical, for the following reasons:

• Growth and productivity. Ecosystem degradation can lower potential output by affecting agricultural yields, water availability, energy systems, infrastructure reliability, and labour productivity. Over time, these effects alter medium- and long-term growth trajectories.
• Fiscal stability and debt sustainability. Loss of natural buffers such as wetlands, forests, and reefs increases disaster-related costs and the volatility of public expenditure. For nature-exposed economies, this can materially affect debt sustainability analysis and sovereign risk. Debt assessments that exclude ecosystem degradation risk systematically underestimating structural fiscal pressures, as we have argued previously.
• Financial system exposure. Nature-related shocks propagate through credit markets, insurance systems, and global value chains. Banks, insurers, and investors exposed to nature-dependent sectors face structural risks that are not fully captured in traditional models – as highlighted in our previous work with the Network for Greening the Financial System and the European Central Bank.
• Long-term investment strategy. Aligning investment with long-term resilience and asset preservation can unlock substantial economic value. This is clear, for example, in our recent evidence reviews with the Taskforce on Nature-related Financial Disclosures, Global Canopy and the University of Oxford, and our review of evidence from the World Bank’s Country Climate Development Reports.

A central conclusion of the workshop was that failure to integrate nature into macroeconomic baselines biases investment planning against resilience. When ecosystem services and avoided losses are excluded from models:

• Nature-positive investments appear as costs rather than growth-enhancing assets
• The returns from loss prevention and restoration are systematically undervalued
• Medium-term frameworks underestimate structural risk.

Conversely, integrating nature into macroeconomic projections allows governments, IFIs, and investors to demonstrate that protecting and restoring natural capital can strengthen growth quality, reduce volatility, and improve long-term asset performance.

This reframes nature not as a constraint, but as economic infrastructure.

The challenge is integration, not measurement; decisions, not metrics

Natural capital accounting has advanced significantly. International standards exist through the UN System of Environmental-Economic Accounting. Many countries now produce ecosystem accounts. The Gross Ecosystem Product (GEP), piloted in China, illustrates how ecosystem service flows can be made visible alongside GDP.

Absence of data is not the problem; rather, it is that these measures rarely feed into baseline growth projections, macro-fiscal frameworks, debt sustainability assessments, surveillance processes, lending and investment risk and return frameworks, stress testing, or risk modelling. Unless nature-related information enters the core analytical machinery that shapes economic and financial decisions, it will remain peripheral.

The workshop emphasised that integration does not require entirely new models, frameworks, or systems. In many cases, it means adjusting assumptions and making explicit where nature-related effects alter growth, fiscal, and risk trajectories.

Furthermore, indicators are not the objective: decisions are. The task is to translate ecosystem information into decision-relevant signals that influence fiscal strategy, public investment, financial regulation, and long-term development planning and investment.

Macroeconomic models and frameworks will always be simplifications. The aim is not to eliminate uncertainty but to avoid systematic blind spots. Making nature visible within macroeconomic analysis improves the credibility of growth projections and the robustness of fiscal planning.

Protecting the economic foundation

The IPBES report calls for reforming financial and economic systems so that biodiversity and nature’s contributions to people are properly valued. The LSE-hosted workshop reached a complementary conclusion: macroeconomic systems that remain blind to nature risk misjudging growth, stability, and resilience.

Nature is an asset base. It is economic infrastructure. It is the enabling environment for all our best ambitions for people, planet and prosperity. Economic strategies that ignore its depreciation overstate sustainable growth and understate risk. Fiscal projections that exclude ecosystem degradation embed optimism bias. Investment decisions that overlook avoided losses undervalue prevention.

Integrating nature into macroeconomic models and core economic decision-making is therefore not an environmental add-on. It is a prerequisite for credible fiscal planning, resilient development pathways, and sound long-term investment in a world where ecological limits are increasingly economically binding.

These conclusions are not new; they were central, for example, to the Dasgupta Review on the economics of biodiversity and in the work of many leading academics and institutions around the world. We have the tools and evidence we need. It is time to align practice with reality.

The full workshop report can be accessed here: https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2026/02/Integrating-Nature-into-Macroeconomic-Models.pdf. 

The authors wish to thank the 35 experts who contributed to the workshop, held on 23 January 2026 from institutions including LSE, Stanford University, University of Cambridge, University of Oxford, SOAS, University of Minnesota, University of Delaware, IFIs, Agence Française de Développement, Taskforce on Nature-related Financial Disclosures, Nature Finance, UN Environment Programme World Conservation Monitoring Centre, The Nature Conservancy, and several central banks.