New research indicates that environmental degradation is significantly hampering the UK economy, potentially causing a 12% reduction in GDP in the future-a larger impact than the global financial crisis and the COVID-19 pandemic.
This pioneering analysis, conducted by the Green Finance Institute (GFI) and a coalition of leading research bodies including the Environmental Change Institute at the University of Oxford, the University of Reading, the UN Environment Programme World Conservation Monitoring Centre (UNEP-WCMC), and the National Institute of Economic and Social Research (NIESR), quantifies the economic threats posed by the deterioration of both domestic and global natural ecosystems.
Economic costs of nature loss
According to the study, the potential 12% loss to GDP from environmental decline is considerable, surpassing the approximately 5% GDP reduction during the 2008 financial crisis and closely mirroring the up to 11% decline during the 2020 COVID-19 outbreak. This research was spearheaded by the GFI with contributions from scientific and financial experts, guided by the Department for Environment, Food and Rural Affairs (Defra), HM Treasury (HMT), and the Taskforce on Nature-related Financial Disclosures (TNFD), with additional insights from the Financial Conduct Authority (FCA).
The analysis demonstrates that risks from nature-related factors are as severe, if not more so, than those from climate change. However, while the economic repercussions of climate change are increasingly recognised, the material costs associated with nature degradation remain largely overlooked in financial and business decision-making. This leaves the UK's economy and financial sector vulnerable as these risks escalate.
The UK is among the most nature-depleted nations globally, with three-quarters of its territories highly degraded, posing significant risks to financial services and the broader economy. The report also revealed that half of the UK's nature-related financial risks are international. It includes a new inventory detailing domestic and international nature-related risks not currently reflected in national assessments, encompassing issues such as soil health decline, water shortages, global food security threats, zoonotic diseases, antimicrobial resistance, and transition and litigation risks.
Certain sectors face particularly acute nature-related financial risks. Agriculture, for example, faces challenges linked to water availability, climate regulation, soil quality, and pollution, which could affect food production. The utilities sector, reliant on surface water for cooling power stations, could face production hurdles and higher energy prices if water supplies are constrained.
Addressing nature risks
The report estimates that these nature-related risks could lead to a 4-5% reduction in the value of domestic portfolios for some banks, suggesting these projections might be conservative. Thus, nature-related risks could affect not only the economy but also financial stability.
Highlighting the importance of these findings, the report calls for immediate action from governments, central banks, regulators, and the financial sector to manage nature-related risks effectively and establish the UK as a leader in this field. Addressing these issues proactively can offer businesses competitive advantages, especially within their supply chains.
The GFI and its collaborators recommend that both public and private sectors disclose nature-related risks and take decisive action to achieve the targets set in the Global Biodiversity Framework (GBF), underlining the urgency of these measures.
Dr Nicola Ranger, Director for Greening Finance at the UK Integrating Finance and Biodiversity Programme and the Environmental Change Institute, University of Oxford, one of the lead authors of the report said:
"Over the last decade, central banks and financial institutions woke up to the risks posed by climate change and we've seen meaningful steps to address them, including mandating disclosures and beginning to shift capital flows toward green sectors and technologies. With this report, we comprehensively demonstrate that risks from environmental degradation and biodiversity loss are at least as severe and urgent, and indeed that if not addressed, will double climate change losses."
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