Economic Dependence on Nature: The Unseen Backbone of the Global Economy
In today's rapidly evolving business landscape, understanding the intricate relationship between businesses and ecosystems has become more than a matter of corporate responsibility – it's a strategic imperative. The stark reality is that biodiversity loss now presents a greater economic risk than climate change, a fact that can no longer be overlooked by the business community. A landmark report by the World Economic Forum highlighted that $44 trillion of economic value generation – over half of the world's total GDP – is moderately or highly dependent on nature.
While climate change has been at the forefront of environmental concerns for decades, the impact of biodiversity loss is now being recognized as an equally, if not more, critical threat. A recent World Bank report stated that global GDP could fall by 2.3%, equivalent to $2.7 trillion, by 2030 if a partial ecosystem collapse occurs. Compared with a baseline of no change in the state of nature, this scenario would slow GDP growth by 9.5%. Importantly, such a collapse is not uniformly distributed across regions, and areas with lower incomes would be disproportionately more affected than wealthier regions.
A landmark report by the World Economic Forum highlighted that $44 trillion of economic value generation – over half of the world's total GDP – is moderately or highly dependent on nature.
But how can this be? When we look out the window, we still see birds chirping in the trees and bees buzzing in the garden during warmer months. There may be a global increase in the number of endangered species due to warming temperatures, but how could this be severe enough to pose the risk of economic collapse?
Here's why biodiversity loss poses a potentially greater risk to the economy:
Foundation of Ecosystem Services: Biodiversity is essential for the functioning of ecosystems, which, in turn, provide vital services to the economy. These include pollination of crops, purification of water and air, disease control, and climate regulation. The degradation of biodiversity can disrupt these services, leading to direct economic losses. For example, the decline in bee populations affects pollination, directly impacting agricultural productivity. In North America, the relative abundance of several pollinating bumble bee species has declined by up to 96%, which could cost US crops up to $50 billion a year.
Risk of Systemic Collapse: Unlike climate change, which is often perceived as a gradual process, biodiversity loss can lead to sudden and irreversible changes in ecosystems. The collapse of a key species in an ecosystem, for instance, can lead to a cascade of effects, potentially causing entire systems to fail. This sudden collapse poses a significant risk to economic activities that depend on these ecosystems. A classic example is the cod fishery collapse off the coast of Newfoundland from overfishing, once one of the world’s richest fishing grounds that has never recovered. The collapse cost the Canadian fishing sector 30,000 jobs with economic losses in the billions. This type of event can be further compounded by climate change, including rising temperatures and the increased frequency and severity of perils, such as hurricanes, droughts, floods and wildfires.
Hidden Economic Value: Biodiversity's economic value is often not adequately captured in market transactions, leading to its undervaluation and overexploitation. The loss of biodiversity, therefore, represents a loss of potential economic value that is not always immediately apparent but has long-term implications. This is prompting major investor disclosure frameworks, such as the Taskforce for Nature-related Disclosure (TNFD), that asks companies to disclose how their business may be at risk and how they are mitigating it. The financial and reputational impacts on companies are increasing, and investors want to know about it. Just look at the recent $10.5 billion lawsuit settlement against 3M regarding their liability for PFAS contamination, also known as “forever chemicals,” into local waterways. The company’s share price declined by 66%, partly due to continued liability concerns.
The Way Forward: Integrating Ecosystem Considerations into Business Strategy
For business leaders, the path forward involves a paradigm shift. It's no longer about merely reducing harm but actively contributing to ecosystem health. This firstly entails risk assessment and management of a business’s dependency on ecosystem services. The TNFD recommendations provide companies and financial institutions with a risk management and disclosure framework to identify, assess, manage and disclose nature-related issues.
As our understanding of the economic implications of biodiversity loss deepens, businesses must rise to the challenge. By recognizing their dependency on ecosystems and proactively engaging in conservation and sustainable practices, companies can safeguard their future while contributing to the health of the planet.
