The butterfly effect

It has long been clear that changes in climate and nature are inextricably linked. Alongside the climate crisis, we are in the midst of a devastating decline in species globally – a nature crisis recognised as the sixth mass extinction. According to WWF’s Living Planet Report 2022, wildlife populations have plummeted by 69% since the 1970s, and insect pollinators – the bottom line of the food chain – are disappearing frighteningly fast. In the next few decades, as many as 40% of the world's species could become extinct, including bees, ants and butterflies. These insects represent some of the most significant pollinators of plants, and hence global food supply. A new study in Environmental Health Perspectives estimates that half a million people are currently dying prematurely every year due to global insect pollinator decline, because of its impact on availability and price of foods such as grains, nuts, legumes, fruits and vegetables. And the researchers say their estimate is “conservative.” 

 

Like the climate crisis, this is driven by human activity, primarily (though not limited to) unsustainable land, water and energy use. Currently 40% of all land has been converted for food production. Agriculture is also responsible for 90% of global deforestation and accounts for 70% of the planet’s freshwater use, devastating the species that inhabit those places by significantly altering their habitats. It’s evident that agriculture at scale is one of the biggest human-caused threats to species extinction and our ecosystems. To make matters worse, unsustainable food production and consumption are significant contributors to greenhouse gas emissions, causing atmospheric temperatures to rise, wreaking havoc across the globe. 

 

Alongside this, we know that when habitats like forests and wetlands are degraded, the carbon they stored is released back into the atmosphere, contributing significantly to climate change. And climate change is a top driver of nature loss, thus squaring the circle and causing outcomes like extreme weather events, ocean acidification and droughts. In turn, ecosystem damage results in further biodiversity loss, accelerating the destructive cycle. 

 

Areas with the highest species richness, the world’s biodiversity hotspots, are predicted to experience the highest rates of nature loss due to coextinctions - the loss of species caused by other extinctions - over the coming decades. Coextinction is a major contributor to global biodiversity loss, strongly amplifying the impact of primary (e.g. climate-driven) extinctions and highlighting the complex interlinkage of natural systems. 

 

Nonetheless, there is a glimmer of light appearing through the gloom - companies are starting to realise that addressing the nature and climate emergencies together is now critical, and there is a move to do something about it. In order to drive change there is of course a vital need to ensure finance flows in the right direction, and biodiversity loss, coextinction, and climate change are crucial considerations for the finance sector. 

 

The World Economic Forum's 2023 Global Risks Report cited nature loss as the fourth largest long term global risk and a major systemic risk for financial markets and investors. Despite this threat, it is often not accounted for in financial decision-making. But ESG focused investment is scaling rapidly. Global ESG assets are expected to track $53trillion by 2025, or more than a third of our global asset base ($140trillion). As interest grows and investor demographics change as the next generation takes over, asset owners will want to understand and manage their impact on nature. 

 

Asset managers increasingly have a responsibility to consider nature risk and impact as part of their fiduciary duties. The G in ESG - Governance - increasingly requires Boards to demonstrate understanding of the material risks to the business; nature and climate risks are not exempt. Regulators and financial institutions are demanding investor reporting on nature impact, particularly with the progress of the TNFD and the developing availability of nature-related data. If the global economy is to work for both nature and investors, every dollar invested in global capital markets needs to be aligned with nature-positive outcomes. 

 

Earlier this month (February 2023), E.sun Financial Holding Co. Ltd published its 2021 Climate and Environmental Report. Nature and climate are addressed at the same time by combining recommendations provided by the TCFD (the Taskforce for Climate-related Financial Disclosures) and the TNFD (the Taskforce for Nature-related Financial Disclosures) using the draft beta framework v0.2 published in June 2022. This is possibly one of the first integrated nature and climate-related disclosures. TCFD is now a mandatory requirement for reporting climate risk in multiple jurisdictions around the world, and is increasingly viewed as non-negotiable by investors even when not mandated. Although the TNFD framework is still under development, the existing beta version 4.0 is now available for review, and the final version of the recommendations and framework will be ready in September 2023. 

 

A small change in starting conditions can lead to vastly different outcomes. Understanding the butterfly effect can give us a new lens through which to view business, markets, and more.