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Biodiversity Risk, Natural Capital and actuarial practice

A new cross-sector work programme has been launched by CUSP researcher Aled Jones together with the Institute and Faculty of the Actuaries, to take forward a series of activities including think pieces, webinars and external engagement to ensure the proactive engagement of the actuary profession with the importance, perils and impacts of global biodiversity risks. This blog is outlining the agenda, and has been prepared by the Biodiversity and Natural Capital Working party, a volunteer group working under the Sustainability Board of the IFoA. The members are:  CUSP co-investigator Aled Jones (Chair), Ryan Allison, Georgi Bedenham, Bhavin Bharadwa, Alex Darsley, Joseph Clyde, and Nick Spencer. The text first appeared on the IFoA website.

Biodiversity is a top five global risk

There are more than 10 million different species of animals, plants, fungi and microorganisms on earth, and humanity depends on this biodiversity to survive and thrive. Recent studies have suggested that the mass degradation of natural habitats has led to a significant proportion of original biodiversity being lost worldwide, with global wildlife populations declining by as much as 60% in the last 50 years (a mass extinction). In its Global Risks Report 2020, the World Economic Forum ranked biodiversity loss and ecosystem collapse in the top five global risks in terms of both likelihood and impact. To put into context, this ranks higher than pandemics, cyber attacks or financial crises.

Actuaries are well placed to consider the impacts of biodiversity risks

The services provided by nature, underpinned by biodiversity, support our economies but are often taken for granted.  Therefore, undermining these services poses not just an ecological, but a financial risk.  The economic and financial impacts of biodiversity loss are hard to quantify due to their long-term, uncertain and intangible nature, which means that actuaries are well placed to contribute. These risks will have a material effect on the principal areas of actuarial work and so should be taken into account when we carry out our work. This is an important topic on which there has been little actuarial discussion to date. It will include concepts such as natural capital and valuation of ecosystem services which are widely contested especially due to the use of financialisation and monetisation of nature.

The natural capital approach has been championed by the UK Government as well as various business groups.  This is controversial to some of the NGO and international community as they believe that it leads to unintended consequences including potentially worsening biodiversity outcomes and increasing global financial inequalities. Tools capable of assessing the impact of decisions/investments/projects on the environment in terms of costs and benefits need to be developed as we potentially transition towards conservation and a low-carbon economy.

Initial paper on the importance of biodiversity to actuaries and areas for future development

A working party has been formed to support the thinking in this area within the Institute and we are now publishing an initial position paper. This brings together our (collective) reflections on the political and regulatory context as well as the implications for actuarial work outlining the materiality of the risk, professional duty and public interest.  It also considers the concept of natural capital which we will investigate further to see how/if it can be of use to the actuarial profession.

Building on this work we intend to:

  • Galvanise discussion and debate within the actuarial community on this important topic.
  • Develop think pieces on natural capital, valuation metrics, biodiversity & justice, and zoonotic disease risk.
  • Build a programme of webinars and blogs around the Convention on Biological Diversity conference in Kunming, China, 17-30 May 2021.
  • Develop educational resources
  • Develop the case for a more detailed research study on the ‘Natural Capital’ approach (pros and cons) and data requirements.
  • Provide inputs to upcoming business initiatives and government consultations as appropriate.

COVID-19 offers a particularly important backdrop in which to start these discussions. Animal to human virus transmission is not uncommon, but of course rarely has such a global impact as COVID-19. However, how should actuaries include the risk of global pandemics into their register of systemic risks?.

We hope this paper is a useful introduction—and please watch out for further work in the coming months.

Further Reading

The COVID-19 pandemic has caused dramatic and unprecedented impacts on both global health and economies. Many governments are now proposing recovery packages to get back to normal, but the 2019 Intergovernmental Science-Policy Platform for Biodiversity and Ecosystem Services Global Assessment indicated that business as usual has created widespread ecosystem degradation. Therefore, a post-COVID world needs to tackle the economic drivers that create ecological disruptions.
The COVID-19 pandemic has caused dramatic and unprecedented impacts on both global health and economies. Many governments are now proposing recovery packages to get back to normal, but the 2019 Intergovernmental Science-Policy Platform for Biodiversity and Ecosystem Services Global Assessment indicated that business as usual has created widespread ecosystem degradation. Therefore, a post-COVID world needs to tackle the economic drivers that create ecological disruptions.
Economy
Finance
Nature
Society
October 26, 2020
In early Spring this year, written submissions were invited to aid the Committee in prioritising its future programme of work. CUSP director Tim Jackson submitted evidence, making the case for necessary innovations in governance and a realistic and responsible approach to the management of the economy: Sustainable Development Goals and the 2050 Vision for Biodiversity cannot be achieved without transformative change, the conditions for which have to be put in place now.
In early Spring this year, written submissions were invited to aid the Committee in prioritising its future programme of work. CUSP director Tim Jackson submitted evidence, making the case for necessary innovations in governance and a realistic and responsible approach to the management of the economy: Sustainable Development Goals and the 2050 Vision for Biodiversity cannot be achieved without transformative change, the conditions for which have to be put in place now.
Economy
Nature
Politics & Enterprise
System Dynamics
April 27, 2020
This paper presents a stock-flow consistent (SFC) macroeconomic simulation model for Canada. Contrary to the widely accepted view, the results suggest that ‘green growth’ (in the Carbon Reduction Scenario) may be slower than ‘brown growth’. More importantly, we show (in the Sustainable Prosperity Scenario) that improved environmental and social outcomes are possible even as the growth rate declines to zero.
This paper presents a stock-flow consistent (SFC) macroeconomic simulation model for Canada. Contrary to the widely accepted view, the results suggest that ‘green growth’ (in the Carbon Reduction Scenario) may be slower than ‘brown growth’. More importantly, we show (in the Sustainable Prosperity Scenario) that improved environmental and social outcomes are possible even as the growth rate declines to zero.
Economy
Finance
System Dynamics
July 24, 2020
Which financial architecture can protect environmental commons? | Article by Tim Jackson and Nick Molho
Which financial architecture can protect environmental commons? | Article by Tim Jackson and Nick Molho
Economy
Finance
Nature
October 20, 2018
Current controversies in valuing the cost of environmental changes like climate change and biodiversity loss have exposed serious flaws in standard welfare economics, Peter Victor writes. Many of these arise from the assumption that social value can be calculated using the revealed or stated preferences of self-regarding, narrowly rational individuals. In recent decades, markets and market-oriented thinking have reached into spheres of life traditionally governed by non-market norms.
Current controversies in valuing the cost of environmental changes like climate change and biodiversity loss have exposed serious flaws in standard welfare economics, Peter Victor writes. Many of these arise from the assumption that social value can be calculated using the revealed or stated preferences of self-regarding, narrowly rational individuals. In recent decades, markets and market-oriented thinking have reached into spheres of life traditionally governed by non-market norms.
Finance
Nature
System Dynamics
February 14, 2020
Natural Capital Valuation: The approaches to natural capital valuation we studied included 15 cases applying the so called Payment for Ecosystem Services framework, three Cost Benefit Analysis cases, and three Compensation Payment Schemes.
Natural Capital Valuation: The approaches to natural capital valuation we studied included 15 cases applying the so called Payment for Ecosystem Services framework, three Cost Benefit Analysis cases, and three Compensation Payment Schemes.
Economy
Finance
Nature
July 14, 2018