• Changes to the state of nature can produce material productivity losses across sectors and economies. Identifying exposure to these potential risks early on is essential to strategic planning for long-term resilience. 

• Scenario analysis for assessing future nature risks to businesses is a valuable tool given the complexity of nature and its interaction with the economy. Adding an economics-based approach to scenario analysis is crucial in identifying priority areas of action. 

Organisations are increasingly recognising the risks to profits posed by disruptions to the natural environment. For instance, the Norwegian Sovereign Wealth fund, which holds USD 1.6 trillion in assets, recently placed 96% of its portfolio under a natural capital risk assessment to evaluate the risks to its investments from their dependence on the environment. In addition, the World Economic Forum recognised the importance of “nature change” and identified biodiversity loss and ecosystem collapse as the second most severe long-term risk in its recent risk report. Clearly, environmental risks are a central concern for investors, political leaders, and business leaders alike.

What does “nature change” mean?
Human activity affects the natural environment in multiple ways, for example through climate change, land use change, pollution, resource extraction, and invasive species. These human-induced impacts can lead to the degradation of the environment, loss of biodiversity, and the disruption of ecosystem services. Ecosystem services are processes or functions of an ecosystem that create value to humans. For example, pollination is an ecosystem service that is important to agriculture. If a land use change destroys the habitat of pollinators, that ecosystem service would be disrupted. Nature change encapsulates all these changes to the ways in which ecosystems function.

Understanding how nature change might affect the economy is hard, but scenario analysis can help. The challenge with assessing future risks from nature change is not only the high ambiguity of the way nature degradation and loss might occur, but also the uncertainty about the economic dependencies on nature and the consequences of any change.

To assess future business risks from nature change, we need to take two key things into account: the complexity of nature and the complexity of the economy. Nature and the economically valuable ecosystems services it provides are made up of highly intricate, interconnected interactions at local and global levels. As a result, processes within ecosystems are subject to collapse if pushed beyond an unknown threshold.

This complexity of nature change is reflected in a lack of a standardised approach or guidance on how to build nature into economic scenarios. There are organisations that provide qualitative guidance, like the Taskforce on Nature-related Financial Disclosures (TNFD) or the Network for Greening the Financial System (NFGS). To integrate this qualitative guidance into economic scenarios, a few extra steps are needed.

To understand how nature changes and what the economic impacts might be, we need to understand which factors, such as political or technological factors, might exert pressure on nature. Current guidance on producing nature scenarios focuses on building exploratory narratives, which describe a range of possible futures based on how the factors that exert pressure might develop. Narrative-based scenarios can then inform economic modelling to quantify future risks and economic impact from nature change.

Quantifying the economic impacts of nature change means considering double materiality; economic activities can both impact and depend on nature. Nature scenarios therefore need to capture both the economic drivers of nature change, and the effects of nature change on economic output. Of course, the magnitudes of these relationships depend on a range of factors, such as how well nature is functioning in a certain location, what nearby sectors are dependent on it, and how a degree of nature change will affect both its functioning and the economic output of those industries dependent on it. Given the link of nature with the economy, and the interconnectedness of the global economy, nature change has the potential to affect all sectors and countries. 

Focusing on how nature change affects the economic productivity of dependent sectors allows for the translation of narrative-based scenarios to quantitative impacts. For example, a sector that is highly dependent on specific ecosystem services—and is operating in a place where the ecosystems that provide these services are being degraded—may face disruptions in production. Alternatively, due to a reduction in the level of nature-derived inputs, the sector may achieve lower per unit productivity, or experience higher costs of production, due to the need to increase other inputs to production to compensate. Without careful consideration, effects on productivity related to nature change might occur in unforeseen ways.