A new report, “Assessing the Materiality of Nature-Related Financial Risks for the UK,” led by Helen Avery of the Green Finance Institute, has been published. The report evaluates the risks of nature-related issues to the UK’s economy, society, and financial sector. It highlights the long-term risks of environmental degradation and biodiversity loss and provides six innovations to evaluate potential sectoral production loss.
The report introduces the UK Nature-Related Risk Inventory (UK-NRRI) and a quantitative risk screening metric called ‘nature-related value at risk’ (nVaR) to aid financial decision-making. The UK-NRRI mirrors the national risk register and identifies 29 key risks that stakeholders can use to identify and prioritise nature-related risks. The report also offers narrative and quantitative scenarios for assessing the potential impact of nature-related risks on the economy and financial stability.
The report quantifies the macroeconomic implications of nature-related risks using the NiGEM model, the world’s leading macroeconomic model. The model’s findings indicate that biodiversity loss could significantly impact the UK’s GDP. Preliminary stress tests suggest that nature-related risks could also threaten the UK’s financial stability, with potential near-term adjustments in the values of domestic holdings of up to 12% loss in GDP.
The report’s key findings reveal that biodiversity loss and environmental degradation pose significant risks to the UK economy, potentially reducing GDP by up to 6% by the 2030s. The study urges a swift transition to an economic and financial system that values and invests in the natural environment, integrating nature and climate considerations.
The report recommends integrating nature within financial decision-making and developing an analytical framework for risk transmission. It provides specific examples, such as the impact of water shortages on agriculture and energy and the risks to the manufacturing sector from supply chain disruptions due to environmental factors.
Recognising the long-term risks that natural capital degradation has on our society is the first and most essential step to begin bolstering preparedness efforts not just for acute shock and stress but chronic risks as well from a systems-based perspective, arguing that a failure to do so may lead to under-preparedness in the face of systemic risk.