{"id":65610,"date":"2023-04-21T08:00:00","date_gmt":"2023-04-21T07:00:00","guid":{"rendered":"https:\/\/www.lse.ac.uk\/granthaminstitute\/?post_type=news&p=65610"},"modified":"2024-08-16T10:27:01","modified_gmt":"2024-08-16T09:27:01","slug":"finance-at-the-nature-frontier","status":"publish","type":"news","link":"https:\/\/www.lse.ac.uk\/granthaminstitute\/news\/finance-at-the-nature-frontier\/","title":{"rendered":"Finance at the nature frontier"},"content":{"rendered":"\n

This commentary is part of a joint series with the LSE Business Review<\/path><\/svg><\/a>.<\/em><\/p>\n\n\n\n

The theme of this year’s Earth Day, celebrated on 22 April, invites us to ‘Invest in Our Planet’. Doing so requires rethinking how we manage economic development and recalibrating how we direct flows in the financial system, writes Danae Kyriakopoulou.<\/p>\n\n\n\n

Nature’s high risks and returns<\/h2>\n\n\n\n

The interdependencies between people, planet and profit are becoming increasingly evident and well-documented<\/path><\/svg><\/a>: we are embedded in nature, not external to it. More than half of global GDP<\/path><\/svg><\/a> is highly or moderately dependent on nature and its services, and around two-thirds<\/path><\/svg><\/a> of food crops rely at least partly on animal pollination. Degradation of the oceans and marine ecosystems risks costing the global economy around $8.4tn<\/path><\/svg><\/a> over the next 15 years. The financial sector is not immune either: nature degradation is an endogenous financial stability risk<\/path><\/svg><\/a>. Indicatively, research in 2021 by the Banque de France<\/path><\/svg><\/a>, the French central bank, concluded that 42% of the securities portfolio of French financial institutions is highly or very highly dependent on one or more ecosystem services. Similar studies for the Netherlands<\/path><\/svg><\/a>, Malaysia<\/path><\/svg><\/a> and Brazil<\/path><\/svg><\/a> have found even stronger dependencies.<\/p>\n\n\n\n

These services are now in a state of emergency. The world has already lost 83%<\/path><\/svg><\/a> of wild mammals and half<\/path><\/svg><\/a> of all plants; human activity has significantly altered three-quarters<\/path><\/svg><\/a> of ice-free land and two-thirds<\/path><\/svg><\/a> of marine environments. Nearly one million<\/path><\/svg><\/a> species of plants and animals are threatened with extinction in the coming decades at a rate tens to hundreds of times faster – and accelerating – than in the past 10 million years. The risks to the economy and the financial system are commensurately large, especially in climate-vulnerable countries: the World Bank estimates that low-income and lower-middle-income countries could lose over 10%<\/path><\/svg><\/a> of their GDP annually by 2030 even in a conservative scenario of only partial ecosystem collapse without biophysical feedback effects<\/path><\/svg><\/a>.<\/p>\n\n\n\n

Putting risks aside, even if we were not trying to solve the existential crisis that is presented by non-substitutable ecosystem collapse, preserving nature and biodiversity makes economic and financial sense in its own right: it has been calculated that $10tn of GDP and 395m jobs<\/path><\/svg><\/a> could be unlocked by 2030 by transforming the three economic systems responsible for 80% of nature loss (i.e. food, land and ocean use; infrastructure and the built environment; and energy and extractives). While getting there will require a significant finance push, the opportunities in the form of future savings mean this is an investment, not a cost.<\/p>\n\n\n\n

Dual crisis: nature and climate<\/h2>\n\n\n\n

Ecosystem collapse is closely interlinked with climate change: the nature and climate crises are reinforcing one another, eroding the very foundations on which our collective wellbeing depends. The Intergovernmental Panel on Climate Change (IPCC) has repeatedly warned that investing in our planet, particularly its ecosystems, is critical if we are to meet the 1.5°C climate target of the Paris Agreement.<\/p>\n\n\n\n

The links run both ways: the natural world is significant to climate change mitigation and adaptation, while climate change drives nature loss.  <\/p>\n\n\n\n

Our oceans and forests serve as natural carbon sinks and are responsible for absorbing 60%<\/path><\/svg><\/a> of the world’s global anthropogenic emissions. Mangroves, sea grasses and corals provide protection for humans and wildlife from both the causes and effects of climate change. For example, coastal mangroves store three to five times<\/path><\/svg><\/a> more carbon than rainforests, and are multiple times cheaper<\/path><\/svg><\/a> than flood-protection infrastructure such as breakwaters. At the same time, the increased frequency, intensity and geographical spread of climate-related disruption is degrading ecosystems and eroding nature’s capacity to mitigate climate change. For example, droughts may result in wetlands releasing significant levels of greenhouse gases<\/path><\/svg><\/a>, while the melting of the Arctic permafrost can also lead to rising emissions<\/path><\/svg><\/a>.<\/p>\n\n\n\n

To break this vicious cycle and restore resilience and productivity, climate and nature goals must be coordinated. At the policy level, this requires harmonising climate goals (such as Nationally Determined Contributions and National Adaptation Plans) with National Biodiversity Strategies and Action Plans. It requires governments to move on from the siloed approach that designates the environment to a single ministry and fails to reflect the systemic risk that nature loss poses to economic development<\/path><\/svg><\/a>. At the financial system level, it requires managing climate- and nature-related risks in relation to one another.  <\/p>\n\n\n\n

Finance for biodiversity<\/h2>\n\n\n\n

The financing needs for delivering the net-zero transition and managing climate- and nature-related risks and opportunities can be broadly grouped into three categories:<\/p>\n\n\n\n