Nature degradation could cause 12% loss to UK GDP in coming years – analysis

Flooding in York in January 2024 Credit: PA Wire/PA Images

Nature degradation could lead to a 12% loss to UK gross domestic product (GDP) by 2030, according to a “groundbreaking” analysis.

Economists, scientists, Government officials and financial regulators provided direction for a new assessment of how the deterioration of ecosystems, both domestically and internationally, could affect Britain’s economy and financial sector.

It comes as the first time the material risk posed by nature decline has been comprehensively assessed, according to the Green Finance Institute (GFI) which led the research.

Nature-related risks were found to be as detrimental, if not more, to the economy as those from climate risks, the organisation said.

The researchers found that chronic risks arising from soil health decline, air pollution, biodiversity loss, or water quality and scarcity could result in an economic growth slowdown equivalent to an erosion of 1.5% to 3% of GDP – or £35 to £70 billion – compared to what it otherwise would be by the late 2020s.

They also found that the addition of event-driven “shocks” like a pandemic, heatwave or floods could cause GDP loss to rise further to between 6% to 12% – equivalent to wiping out £140bn to £300bn of GDP.

This is in comparison to the financial crisis of 2008, which took around 5% off the value of the UK GDP, while the Covid-19 pandemic cost the UK up to 11% in 2020, the researchers said.

Some sectors in particular face higher levels of nature-related financial risk, according to the report.

This includes the agricultural sector, which faces risks associated with water, climate regulation, soil quality, and pollution which could impact food production.

Meanwhile, the utilities sector, which is dependent on surface water for cooling power stations, could see production impeded by any constraint in water supplies, leading to rising energy prices.

More widely, the analysis found that impacts on the real economy will affect banks and other financial institutions.

It suggests that some banks could see reductions in the value of their domestic portfolios of up to around 4 to 5% in some cases but researchers said these estimates are likely to be conservative.

The report noted that the UK is one of the most nature-depleted countries in the world with three-quarters of the country having a high level of ecosystem degradation.

But the analysis also showed that half of the UK’s nature-related financial risks originate overseas.

The GFI said it worked with the Environment Department (Defra), the Treasury, the Taskforce on Nature-related Financial Disclosures (TNFD) and the Financial Conduct Authority (FCA) while developing the analysis.

The organisation said that while the economic costs of climate change are becoming increasingly accepted, the risks posed by nature degradation amount to a material cost that has not been sufficiently factored into financial and business decision-making.

It argued that these findings present an opportunity for swift action from governments, central banks, regulators and the financial sector to proactively manage nature-related risks.

Helen Avery, GFI director of nature programmes, said: “The erosion of natural capital generates significant and long-term risks to society, our economy and, therefore to financial institutions and potentially our financial resilience.

“Evidencing this material risk is a vital step towards transitioning our economic and financial system to one that values and invests in the natural environment.”

Environment minister Lord Benyon said: “Nature underpins the health of our economy, and it is under threat from a global nature crisis.

“The responsibility to conserve nature lies with all sectors and sections of society, and green finance has a crucial role to play. The findings in this report will help people and institutions across the corporate and finance sectors understand that it is in their own interests to go further and faster for the planet to protect it for future generations.”

TNFD chair David Craig said the “groundbreaking” report “illustrates the importance of addressing both nature and climate risks to the UK economy and financial system, and is a call to action for UK financial institutions to take an integrated approach to transition planning and disclosures”.

Steve Reed MP, Labour’s shadow environment secretary, said: “Our economic security depends on protecting nature.

“That’s why it’s so disastrous that the Conservatives have left the UK as one of the most nature-depleted countries in the world.

“Labour will reverse the tide of destruction of our natural world by cleaning up our water and air, and growing nature-rich habitats for wildlife to thrive.”