Degradation of nature could reduce UK GDP by 12 per cent

City of London skyline at sunset

Researchers at the UN Environment Programme World Conservation Monitoring Centre (UNEP-WCMC) have contributed to the first analysis to quantify the impact of nature degradation on a country’s economy. The work, published today, has found that:

  • Damage to the natural environment, both domestically and globally, is slowing UK growth and productivity, and could lead to an estimated 12 per cent loss of GDP as early as 2030.
  • This estimated loss is larger than that resulting from the global financial crisis and Covid-19 pandemic.
  • Action is needed to strengthen the resilience of the UK’s economic and financial sectors, and to help steer financial flows away from the damaging activities that create these risks.

The first-of-its-kind analysis was led by the Green Finance Institute (GFI), with a technical team involving the UK’s top nature economists: UNEP-WCMC, the Environmental Change Institute at the University of Oxford, the University of Reading and the National Institute of Economic and Social Research. It features inputs from the scientific and financial community as well as direction from the Department for Environment, Food and Rural Affairs, HM Treasury, the Taskforce on Nature-related Financial Disclosures and input from the Financial Conduct Authority.

The report – Assessing the Materiality of Nature-Related Financial Risks for the UK – analyses the impact to the UK economy and financial sector of the depletion of natural ecosystems, both domestically and globally. This includes soil health decline; global food security repercussions; zoonotic diseases that pass from animals to humans, like bird flu, swine flu, and Covid-19; and antimicrobial resistance, where bacteria and viruses no longer respond to medicines.   

Nature-related risks are as detrimental or more to the economy as those from climate risks, the analysis shows. Yet, while the economic costs of climate change are becoming increasingly accepted, the risks posed by nature degradation amount to a material cost that has not been sufficiently factored into financial and business decision-making.

The findings of this important analysis are striking and drive home how vital it is to integrate nature into decision-making. If the UK is to avoid GDP losses over the coming decade greater than those during the global financial crisis and Covid-19 pandemic, steps will need to be taken to reduce negative impacts on the ecosystems that sustain the UK economy. UNEP-WCMC is proud to have contributed the methodology that underpinned this vital work through our ENCORE tool, and we hope this first-of-its-kind analysis will inspire other countries to assess the risks posed to their economies by the degradation of nature.

Neville Ash, director of UNEP-WCMC

ENCORE tool provided foundational analysis

The assessment that underpins the analysis was provided by the powerful Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE) tool. ENCORE was jointly developed by UNEP-WCMC, which also manages it in collaboration with the UNEP Finance Initiative (UNEP FI) and Global Canopy, a leading provider of data on nature. The online tool allows financial institutions to understand their dependencies and impacts on nature, and is crucial for strategic planning and reporting.

UNEP-WCMC researchers used ENCORE to analyse data released by the Bank of England on UK banks and insurers’ investments by sector. This allowed UNEP-WCMC to quantity how exposed financial institutions are to nature-related risk, that is, their ‘dependency’ on ecosystem services (the benefits nature provides to humans, such as raw materials, crop pollination and flood-control). The analysis revealed that £930 billion out of UK banks and insurers’ total financial assets of £3.8 trillion (52 per cent) are at least moderately dependent on ecosystem services directly through investments and lending to underlying sectors, with £179 billion, or 10 per cent, of these highly or very highly dependent.

UNEP-WCMC’s work also revealed which sectors are most dependent on ecosystem services and what those ecosystem services are. The UK investment portfolio is most exposed to the regulation of surface water quantity, followed by flood and storm protection, and then ground stabilisation and erosion control, with financial institutions exposed through their investments in infrastructure assets such as manufacturing sites, warehouses and office buildings.

Flooding of the River Severn in Shropshire, UK, in 2020

The team also investigated where in the world the wider assets are that UK banks and insurers are dependent upon – their “upstream financial dependencies”. For example, a bank may have invested in a food company, which is in turn dependant on farmers and packaging companies in different parts of the world to supply key components of the products. Using a variety of tools and databases, the researchers found that the £3.8 trillion of assets within the UK’s investment portfolio are dependent on £5.8 trillion in economic activity embedded in their supply chains.  

The researchers then assessed this upstream economic activity, using the ENCORE knowledge base and a data layer developed by UNEP-WCMC identifying hotspots of natural capital depletion to estimate the degradation of ecosystem services. This revealed that approximately £2.5 trillion (44 per cent) of upstream exposures are highly or very highly dependent on nature, and in areas of the world where ecosystem services are degraded. This places this 44 per cent at particular risk as degradation of natural capital is likely to lead to the loss of ecosystem services that economic activity depends upon.

Nature-related risk needs to be integrated into decision-making

Researchers at the University of Oxford and the University of Reading took UNEP-WCMC's initial dependencies analysis and developed it further in an in-depth assessment of nature risks. By developing three scenarios, and running them through a macroeconomic model, the researchers found that overall the deterioration of the UK’s natural environment could lead to an estimated GDP loss of 12 per cent within the next decade. In comparison, the financial crisis of 2007-08 took 5 per cent off the value of the UK economy in 2008, while the Covid-19 pandemic cost the UK 11 per cent of its GDP in 2020. 

While the whole of the economy is exposed to these risks, particular sectors, and therefore their investors, are facing higher levels of risk. Highlighted in the analysis are agriculture, manufacturing, and utilities. For example, the agricultural sector faces the highest risk relative to its economic output due to the risks associated with water, climate regulation, soil quality, and pollution, which could impact food production.

Nature degradation globally also affects the UK economy, as the UK is highly connected with global supply chains. The research found that around half of UK nature-related risks originated from overseas, through supply chains and financial exposures. The services and manufacturing sectors present the greatest material risks from overseas – from the loss of pollination and storm protection, for example. The highest risks were related to regulation of water flows.

Within the analysis, a new inventory developed by the researchers charts these domestic and international nature-related risks to the economy, many of which are not currently captured in national risk assessments. The UK Nature-related Risk Inventory, the first of its kind, helps decision-makers understand and manage nature-related risks within and to the UK economy. It focuses on economic risks arising from nature degradation both within the UK and overseas, and also captures transition risks, such as an acceleration of the stringency of nature protection policies, and litigation risks, such as legal cases filed against businesses or governments.

The findings and risk inventory present an opportunity for swift action from governments, central banks, regulators and the financial sector to proactively manage nature-related risks and to position the UK as a global leader in addressing them. For businesses there are early-mover advantages for those that act to improve and support resiliency, particularly within their supply chains.

The GFI and technical team make several recommendations for the public and private sectors. These include disclosures of nature-related risks and taking urgent action to meet the targets included within the Global Biodiversity Framework (GBF). By helping businesses assess their biodiversity-related dependencies and impacts, UNEP-WCMC’s ENCORE tool can help organisations as they work to meet the goals set out in the GBF.

Main image: AdobeStock_251688569

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