Scientific research on ecosystem ‘tipping points’ highlights the risk of unexpected, compounding, and accelerating declines in the quality, quantity and resilience of natural capital. This can present significant challenges to businesses and investors as they seek to assess the complex interplay of dependencies, impacts and risks, including between nature and climate, over different timeframes.
The loss and/or decline of the state of nature. This includes, but is not limited to, the reduction of any aspect of biological diversity e.g., diversity at the genetic, species and ecosystem levels in a particular area through death (including extinction), destruction or manual removal.
The prospect of tipping points in local ecosystems, which lead to changes that mean ecosystem services are no longer available to organisations who depend on them, accentuates the risk of stranded assets. Scenario analysis has a valuable role to play in this context to inform short-term corporate strategy, risk management and capital allocation decisions that are as robust as possible to a number of plausible futures. While general principles of diversification of dependencies on nature will remain central to effective risk management, in some cases, managing the risks associated with nature loss may require total business transformation and new ways of conducting business. This could include, for example, new ways of approaching business with a granular understanding of where operations and value chains are located.
Potential threats posed to an organisation linked to their and wider society’s dependencies on nature and nature impacts. These can derive from physical, transition and systemic risks.
All global economic enterprise depends on the functioning of earth systems, such as a stable climate and ecosystem services, such as the provision of biomass (raw materials).
Nature-related physical risks are a direct result of an organisation’s dependence on nature. Physical risks arise when natural systems are compromised, due to the impact of climatic events (e.g. extremes of weather such as a drought), geologic events (e.g. seismic events such as an earthquake) events or changes in ecosystem equilibria, such as soil quality or marine ecology, which affect the ecosystem services organisations depend on. These can be acute, chronic, or both. Nature-related physical risks arise as a result of changes in the biotic (living) and abiotic (non-living) conditions that support healthy, functioning ecosystems. Physical risks are usually location-specific.
Nature-related physical risks are often associated with climate-related physical risks.
Nature-related transition risks are risks that result from a misalignment between an organisation’s or investor’s strategy and management and the changing regulatory, policy or societal landscape in which it operates. Developments aimed at halting or reversing damage to nature, such as government measures, technological breakthroughs, market changes, litigation and changing consumer preferences can all create or change transition risks.
Systemic risks are risks arising from the breakdown of the entire system, rather than the failure of individual parts. Nature-related systemic risks are characterized by modest tipping points combining indirectly to produce large failures and cascading interactions of physical and transition risks, one loss triggers a chain of others and stops systems from recovering their equilibrium after a shock.
Scientists predict that if the current rates of nature loss continue, some ecosystems may cross irreversible tipping points with far-reaching economic and social impacts. Nature-related systemic risks can trigger system-wide instability and cause further physical and transition risks to individual parts.
Systemic risks require the consideration of a multidimensional perspective and complex relationships in the markets. Scenario analysis can be used to assess the short, medium and long term implications for an organisation, which can then be input to the enterprise risk management process. While there is acknowledgement of systemic risk in principle, there is currently limited consideration of systemic risk in existing risk management and disclosure frameworks.
An example is the loss of a keystone species, such as sea otters, which have a critical role in ecosystem community structure. When sea otters were hunted to near extinction in the 1900s, the coastal ecosystems flipped, and biomass production was greatly reduced.
Links between nature- and climate-related risks
Nature-related risks are closely linked to climate-related risks. Ecosystems play a key role in emitting and sequestrating greenhouse gas emissions, and in supporting the adaptation to a changing climate. For example, the world’s forests are a net carbon sink that absorb 7.6 billion tonnes of CO2 per year, which is around 15% of the estimated 50 billion tonnes of greenhouse gases emitted annually. Nature’s absorption of greenhouse gas emissions slows atmospheric CO2 concentrations, but with nature’s capacity to sequester greenhouse gases currently far below global annual emissions, we have an imbalance that leads to global warming. This, in turn, drives impacts on nature. Climate change is one of the five key drivers of nature change.
Moreover, drivers of the loss of nature, such as deforestation, are significant sources of greenhouse gas emissions. Nature-related risks are therefore closely linked to climate-related risks in several ways, and the risks must be considered together. When assessing the financial risks associated with climate change, the role of the loss of nature in climate feedback loops and tipping points must also be considered. (See Priority areas for further development for more details on the TNFD’s work on the climate-nature nexus.)
There are close relationships between the different forms of risks. Physical and transition risks can interact and affect economic agents through various channels, before materialising into traditional sources of financial risk (e.g., credit or market risk). For example, organisations can generate acute physical risk by removing coastal marshes, leading to potential damage costs linked to loss of coastal infrastructure from storms. This can also generate a transition risk, specifically policy and legal risk (if that action was illegal) and reputation risk (if it is negatively perceived by consumers). If sufficient organisations in that region remove coastal marshes, then whole regions of industry may suffer from a lack of protection from coastal storms, resulting in systemic risk.
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