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Our economy depends on the services that nature provides. Yet despite these services being worth more than USD $100 trillion per year, nature is in decline.1 Twenty-three per cent of land is now degraded and ocean ‘dead zones’ span an area greater in size than the United Kingdom.
As nature declines, businesses, households and financial institutions are put at risk. To translate our trillions of dollars of dependence on nature into identification of specific risks posed by nature loss to financial institutions, the Cambridge Institute for Sustainability Leadership (CISL) has created this handbook and a framework for the identification of nature-related financial risks.
This handbook builds on the Dasgupta Review of the economics of biodiversity, enabling financial institutions to begin embedding nature into mainstream financial models, risk frameworks and portfolio strategies. It was co-created by banks, asset managers, CISL’s Centre for Sustainable Finance and academics from the University of Cambridge conservation cluster.i During 2021, this group will use it to identify and assess specific nature-related financial risks.
To make this handbook immediately useful to practitioners we:
1. Define key concepts
2. Detail transmission channels that make nature loss a financial risk
3. Outline a framework that banks and asset managers can use to identify nature-related financial risks
The main audience for this handbook are financial practitioners with limited prior knowledge of biodiversity loss, land degradation or how the decline of nature can put their institution at financial risk. The intent is that it serves as a reference guide for individuals to engage with these subjects further and to use the framework presented to start identifying nature-related financial risks.
Much attention has been devoted to the interaction between climate change and nature loss. While climate change is a substantial driver of nature loss and subsequent nature-related financial risks, others, such as water pollution, also cause considerable financial risks. By understanding and measuring nature-related financial risks, in addition to climate risk, financial institutions move a step closer to understanding how to manage these risks in their portfolio. Through that act of management, the value of nature can be recognised and a transition to a nature-positive economy catalysed.