The past 50 years have brought significant economic prosperity to much of humanity, with the global economy increasing four-fold and life expectancy surging everywhere. However, in achieving this growth we have eroded the natural systems that support our existence and sustained prosperity.
To explore this issue, PwC has collaborated with the World Economic Forum on the first New Nature Economy (NNE) report, a forthcoming series under the Forum’s Nature Action Agenda (NAA). This first report aims to make the case for why the nature crisis is material to business and the economy, including the scale and urgency of nature-related risks and the potential consequences for businesses and the economy.
The New Nature Economy report supports the economic growth strategy recently documented (January 2020) in RECONOMICS: The Path To Resilient Prosperity.
Approximately 1 million species are facing extinction within decades. Ecosystems have declined in size and condition by an average of 47% globally compared to estimated natural baselines. We are crossing the planet’s boundaries and natural systems’ ability to cope, increasing the risk of large-scale, irreversible environmental and societal changes.
It is now becoming clear that the benefits of continuing with this current economic model are at risk of being outweighed by the costs of nature loss. Even as these traditionally have been largely absent from national accounts and corporate balance sheets, they are increasingly emerging as unanticipated business risks and systemic risks to economies and societies worldwide.
2020 is a critical year for nature: world leaders have a unique opportunity at the UN Convention on Biological Diversity (CBD) in Kunming, China, to forge an international agreement to reverse nature loss, akin to the 2015 Paris Agreement on climate change. Business actors and other economic actors will have an important role to play to make this happen.
The report outlines the types of business and economic risks that can arise from nature loss, including key examples of where such risks have materialized, as well as a suggested approach for managing nature-related risk.
The report documents four types of risks, which can also be seen as four categories of economic growth from environmental restoration:
Physical risks
In a similar vein to the repercussions of climate change related damage from storms, floods, heat waves and sea level rise, nature-related damage such as habitat destruction, invasive species and species loss/collapse can also disrupt business value chains, diminishing operational performance, and generating asset quality deterioration. Physical risks can be:
- Commodity risks – Nature is a key contributor to your business’ production processes;
- Supply chain performance risks – Nature is critical to the performance of your supply chain;
- Damage and business continuity risk – Nature provides the stable conditions (i.e. physical security against acute and chronic events) necessary for your business’ operations and continuity; and,
- Business value risk – Nature enables the conditions necessary for maintaining the value of your business (e.g. nature loss can give rise to real estate asset repricing).
Regulatory and legal risks
Increased policy and regulatory intervention in response to nature loss could see some sectors of the economy face pricing shifts in asset values (for example if they hold stranded assets due to legislation change), or higher costs of doing business for companies recognised to have negative nature impacts (e.g. in response to subsidy removals or new taxes and fees).
Laws, policies, regulations and court actions which may affect business operations include:
- Standards/certifications
- Moratoria/bans/fines on access
- Taxes and fees
- Subsidies
- Tradable permits and resource quotas
- Trade directives
- Payment schemes
- Emissions pricing
- Changes in disclosure requirements
- Changes in liability schemes
Market risks
Companies can also face risks to business from emerging products/services, technologies and business models aimed at counteracting nature risks.
Likewise, market risks arise from shifting supply and demand patterns, as consumers and the market react to nature risks.
Reputational risks
Shifts in public sentiment mean that companies face reputational risks from being held accountable by customers, clients, and the wider public for nature loss, including facing litigation for such losses.
This can result in lower brand value, loss of customer base and profits and/or further increases in insurance premia (in the case of legal action).
Photo of Davos, Switzerland (where World Economic Forum meetings are held) by Nici Keil from Pixabay.