The Value and Integration of Biodiversity in Business Decision Making

The Review of The Economics of Biodiversity by Professor Sir Partha Dasgupta commissioned by the UK Treasury was published on 2 February 2021[1]. The Review was tasked to assess the economic benefits of biodiversity, and the economic costs of biodiversity loss; and identify actions which can protect and enhance both biodiversity and economic prosperity. The primary audience for the Review is economic and finance decision makers in the public and private sector. The Review aims to shape the international response to biodiversity loss, and inform global action to deliver the UN Sustainable Development Goals (UN SDGs).

The Review is an important trigger for change which sits alongside a number of other recent developments which are expected to shift conversation to action on the mainstreaming of natural capital accounting and evaluation.

Almost 2 years of analysis culminating in a detailed report will trigger an official UK Government response, be reviewed around the world and is likely to inform significant policy measures. The timing of the latter may be accelerated due to the fifteenth meeting of the Conference of the Parties (COP15) to the Convention on Biological Diversity (CBD) in May and the twenty sixth meeting of the Conference of the Parties (COP26) to the UN Framework Convention on Climate Change in Glasgow in November this year. Likened to the Stern Review for climate change, the Review emphasises the importance of biodiversity, our abject failure to reflect this to date and the need for urgent and fundamental change. In the post COVID-19 context of “Building” or “Growing back better” the report should inform coherent and future looking policy and law. With the Environment Bill in the UK presently on pause, the Review is a timely reminder and if deployed could act as an accelerant to the pace of change affecting all industry and sectors. It has ramifications for the full lifecycle of materials, how they are managed and use of land and redevelopment.

The official headline messages distilled from the Review are:-

1. “Our economies, livelihoods and well-being all depend on our most precious asset: Nature. Biodiversity enables Nature to be productive, resilient and adaptable. Just as diversity within a portfolio of financial assets reduces risk and uncertainty, so diversity within a portfolio of natural assets increases Nature’s resilience to shocks, reducing the risks to Nature’s services.”
2. “We have collectively failed to engage with Nature sustainably, to the extent that our demands far exceed its capacity to supply us with the goods and services we all rely on. Estimates show that between 1992 and 2014, produced capital per person doubled, and human capital per person increased by about 13% globally; but the stock of natural capital per person declined by nearly 40%.”
3. “Our unsustainable engagement with Nature is endangering the prosperity of current and future generations Biodiversity is declining faster than at any time in human history. Many ecosystems, from tropical forests to coral reefs, have already been degraded beyond repair, or are at imminent risk of ‘tipping points’. These tipping points could have catastrophic consequences for our economies and well-being; and it is costly and difficult, if not impossible, to coax an ecosystem back to health once it has tipped into a new state. Low income countries, whose economies are more reliant than high income countries on Nature’s goods and services from within their own borders, stand to lose the most. Reversing these trends requires action now. To do so would be significantly less costly than delay, and would help us to achieve wider societal goals, including addressing climate change (itself a major driver of biodiversity loss) and alleviating poverty.”
4. “At the heart of the problem lies deep-rooted, widespread institutional failure Nature’s worth to society – the true value of the various goods and services it provides – is not reflected in market prices because much of it is open to all at no monetary charge. These pricing distortions have led us to invest relatively more in other assets, such as produced capital, and underinvest in our natural assets.”
5. “The solution starts with understanding and accepting a simple truth: our economies are embedded within Nature, not external to it. The Review’s approach is based firmly in what we know from ecology about how ecosystems function, and how they are affected by economic activity, including the extraction of natural resources for our production and consumption, and the waste we produce through these activities, which ultimately damages ecosystems and undermines their ability to provide the services on which we rely. This approach helps us to understand that the human economy is bounded and reshapes our understanding of what constitutes truly sustainable economic growth and development: accounting fully for the impact of our interactions with Nature and rebalancing our demand with Nature’s capacity to supply.”
6. “We need to change how we think, act and measure success Choosing a sustainable path will require transformative change, underpinned by levels of ambition, coordination and political will akin to, or even greater than, those of the Marshall Plan. The change required should be geared towards three broad transitions. (i) Ensure that our demands on Nature do not exceed its supply, and that we increase Nature’s supply relative to its current level (ii) Change our measures of economic success to guide us on a more sustainable path and (iii) Transform our institutions and systems – in particular our finance and education systems – to enable these changes and sustain them for future generations.”
7. “Transformative change is possible – we and our descendants deserve nothing less.”

Practical application

In practical terms ideas of immediate relevance are:-

1. The interweaving of natural capital in financial accounting and policy and shadow pricing: The conclusion that if the societal goal is to protect and promote well-being across the generations (i.e. ‘social well-being’), governments should measure inclusive wealth (societal means to those ends). Inclusive wealth is the sum of the accounting values of produced capital, human capital and natural capital.
2. The scale of change and challenge: If we are to enhance the supply of natural capital and reduce our demands on the biosphere, the Review states large-scale changes will be required, underpinned by levels of ambition, coordination and political will at least as great as those of the Marshall Plan i.e. the post WW2 recovery in Europe.
3. Financial flows devoted to enhancing natural assets: a system that channels financial investments towards economic activities that enhance our stock of natural assets and encourage sustainable consumption and production activities. Central banks and financial supervisors are identified as actors which can support this by assessing the systemic extent of Nature-related financial risks. A set of global standards is called for underpinned by data that are both credible and useful for decision-making. The Review clearly states that businesses and financial institutions could then be obliged to integrate Nature-related considerations within their objectives.
4. Changing Consumption Patterns and producing less waste: The Review reflects that our ecological footprint is not only made up of the material we take from the biosphere, but also of the transformed material we deposit into it as waste. The policy measures discussed include enforcing standards for re-use, recycling and sharing. Reduction of food waste is high on the agenda.
5. Taxation: At present, no OECD or G20 country collects more than 1% of its GDP in environmental taxes, beyond those related to energy or motor vehicles. This is seen as an opportunity to raise further revenue through environmental taxation.

When the Environment Bill resumes progress through UK Parliament, the present requirements on biodiversity are likely to be re-examined in light of the Review. Globally, the Review should inform wider measures.

Recent developments

Importantly, on 11 March 2021, the United Nations adopted a new statistical framework to better account for biodiversity and ecosystems in national economic planning and policy decision-making, allowing countries to use a common set of rules and methods to track changes in ecosystems and their services. The new framework goes beyond GDP and ensures that natural capital accounts—the contributions of forests, oceans and other ecosystems—complements existing economic accounts. Already the European Commission intend to propose a revision of the Regulation on European Environmental Economic Accounts (EEEA) to expand its coverage to include a new module on natural capital accounting. The Commission has identified that “in the context of the Union's promotion of environmentally responsible business practices, Natural Capital Accounting has potential in providing a concrete basis for business performance reporting by explicitly mapping out impacts and/or dependencies on natural resources and placing a monetary value on them. Specific examples include: Business Accounting and Reporting, The disclosure of non-financial reporting and accounting Directives”.

Separately, under the banner of the European Green Deal Biodiversity Strategy, proposals for binding nature restoration targets in the EU are subject to consultation until 5 April 2021.

A version of this article was first published in the March/April 2021 issue of CIWM's Circular.

[1]Final Report - The Economics of Biodiversity: The Dasgupta Review - GOV.UK (www.gov.uk)