Hidden cost of biodiversity loss

Businesses and financial institutions are increasingly concerned about nature-related financial risks and their impact on their production and revenues. A World Economic Forum report on ‘Nature Risks Rising’ notes that some of the world’s fastest-growing economies are highly vulnerable to nature loss.For example, about one-third of GDP in countries such as India and Indonesia is estimated to be moderately or highly dependent on nature. African countries reported this proportion to be 23% of their GDP. Even large economies such as China, the EU, and the USA, which together account for 60% of global GDP, reported high GDP figures (ranging from $2.1 to $2.7 trillion) generated by nature-dependent sectors.

An analysis of 163 industries and their supply chains found that about $44 trillion of economic value generation — more than half of global GDP — is moderately or highly dependent on nature. Construction, agriculture, food, and beverages are highly nature-dependent sectors with an economic value ($7.9 trillion) that is roughly twice the size of Germany’s economy (about $4 trillion). The pharmaceutical industry depends on tropical rainforests and their plant species for many existing and potential drugs. For instance, roughly half of modern pharmaceuticals are derived from or inspired by natural compounds, including those found in plants, microbes and marine organisms.

Given the high vulnerability of businesses to nature-related financial risks, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) assessed the impacts and dependencies of businesses on biodiversity and on nature’s contributions to people. Its report, prepared by around 80 lead authors and many contributing experts from over 30 countries, emphasises that businesses are central to halting and reversing biodiversity loss but often lack information or tools to address their impacts and dependencies, as well as the risks and opportunities relating to biodiversity and nature’s contributions to people. The current conditions in which businesses operate are not always compatible with achieving a just and sustainable future, and these conditions also perpetuate systemic risks.

Professor Stephen Polasky of the University of Minnesota, one of the Co-Chairs of the report, states that: “The loss of biodiversity is among the most serious threats to business. Yet the twisted reality is that it often seems more profitable to businesses to degrade biodiversity than to protect it. With the right policies, as well as financial and cultural shifts, what is good for nature is also what is best for profitability”. 

The report reveals that since 1992, the average per capita manufactured capital increased by over 100%, but this was realised at high cost, with the natural capital stock declining by 40%. Indigenous people and lands that are rich in biodiversity face the biggest threat, with an estimated 60% of their lands threatened by industrial development and 25% subject to intense resource exploitation.

Global public and private financial flows, estimated at $7.3 trillion in 2023, had direct negative impacts on nature, with private finance alone accounting for 67%. Public spending on environmentally harmful subsidies was estimated at about $2.4 trillion. But only $220 billion of global public and private finance flows in 2023 were directed to the conservation and restoration of biodiversity.

The report calls on corporations to play an important role as environmental stewards and to change their policies and strategies to achieve win-win outcomes for both businesses and biodiversity. It calls for integrating biodiversity-related risks, opportunities, costs and benefits into business decision-making and financial planning. Mechanisms to involve indigenous and local communities (ILK) in decision-making, as well as establish standards in line with global environmental agreements and national biodiversity legislation, to ensure access and benefit sharing and a consent mechanism while using biodiversity in businesses. 

Building awareness among corporates of the multiple values of nature and the vulnerability of their business operations to climate and nature risks can motivate businesses to reorient their strategies to make them more resilient to these risks. 

Call for action

To make informed decisions, the report calls for mapping the roles of different actors in the value chain and integrating communities into value-creation activities such as sourcing, production, and distribution. It advocates for corporations playing a greater role in landscape conservation, restoration and sustainable management. Companies can do this by tapping CSR or other funds.

Different actors, such as governments, businesses, financial institutions, NGOs, and civil society, play important roles in creating an enabling environment for business. Governments need to mainstream biodiversity into policy and planning, incentivise the sustainable use and management of biodiversity, and promote corporate disclosure of biodiversity/nature risks, dependencies, and impacts. Financial actors need to develop and use innovative financial instruments, such as green bonds, for business operations. NGOs, civil society, Indigenous and local communities can play an important role in encouraging responsible business and practices that will lead to positive biodiversity outcomes. 

But are businesses willing to sacrifice short-term gains for long-term interests that will benefit both business and biodiversity? Governments can mandate and incentivise businesses (e.g., by offering tax rebates) to disclose their biodiversity footprint in their financial reports and strategies to reduce it. Only 1 per cent or fewer of publicly reporting companies mention biodiversity impacts in their financial reports. Businesses and financial institutions need to increase green investments and deploy nature-based solutions to address the nature-related risks they face. 

(The writer is the lead author of GEO-7, United Nations Environment Programme, Nairobi and is the chairperson of Centre for Economics, Environment and Society, Bengaluru)