Incorporating Nature into our wealth measures, economic decision-making and financial services regulation

On 2 February 2021, HM Treasury published the final report of a Review led by Professor Sir Partha Dasgupta on the Economics of Biodiversity. Andrew Bailey, Governor of the Bank of England, hailed the Dasgupta Review as “a landmark contribution to our understanding of the relationship between Nature and our economy.” The publication comes ahead of COP15 for Biological Diversity and COP26 for Climate Change, the latter of which the UK will co-host in November.

The report sets out stark statistics on the decline in global biodiversity, including that “estimates of our total impact on Nature suggest that we would require 1.6 Earths to maintain the world’s current living standards.” A key message in the Review is that we should treat Nature as an asset; Nature needs should “enter economic and finance decision-making in the same way buildings, machines, roads and skills do.”

While the 606 page report covers extensive ground, from economic history since year 0, to a description of biodiversity in ecosystems, this blog focuses on some of the implications for the financial services industry, including from a regulatory perspective. While the financial services industry and its regulators have focused significant attention in recent years on climate‑related risks, Professor Dasgupta’s review is a very important and urgent reminder of the need to consider them within the broader set of Nature‑related risks.

Natural capital

The report argues that, as a measure of economic activity, GDP encourages us to pursue “unsustainable economic growth and development”, as it “does not account for the depreciation of assets, including the natural environment.” We should therefore change our measures of economic success. The Review recommends introducing natural capital into national accounting systems. While frameworks for natural capital accounting and assessment exist, the Review notes how these are at different stages of development and that significant problems of design and measurement remain. Nevertheless, the Review concludes that this should not deter governments and businesses and that increased investment in physical accounts and valuation would improve the quality of natural capital accounts. In particular, standardisation of data and modelling approaches, and technical support, would help to embed natural capital accounting in national economic accounts.

While achieving the aim in the report will face significant challenges, progress in seeking to put an accounting value on Nature, as well as its depreciation, may also assist financial services firms with the quantification of Nature-related financial risks.

Focus on Nature-related financial risks

While some regulation has looked at environmental risk – the “E” in ESG – the focus by regulators to date has predominantly been on climate-related financial risks [1]. The Review argues the case for the measurement and disclosure of Nature-related financial risks, which would look at other aspects of natural capital in addition to climate change, such as biodiversity loss, water stress and resource scarcity. Indeed, the Review describes a 2020 study by De Nederlandsche Bank and the Netherlands Environmental Assessment Agency (PBL) which highlights the magnitude of the potential financial impact on Dutch financial institutions that might arise from biodiversity loss. It found that at least 36% (€510 billion) of the €1.4 trillion in financial investments held by Dutch financial institutions were highly or very highly dependent on one or more ecosystem services, and that €28 billion was exposed to products that depend on pollination. 

The Review argues that central banks and financial supervisors should assess the systemic extent of Nature-related financial risks and that a set of global standards is required. Businesses and financial institutions should then be obliged to integrate Nature-related considerations within their objectives and, ultimately, disclose their use of natural capital. The Task Force on Nature-related Financial Disclosures, established in 2020, is described as “a step in that direction”, but to date at least it seems to have been overshadowed by the work of the Task Force on Climate-related Financial Disclosures.

While we are likely to be some way off any new regulation, the Review will place biodiversity firmly on the UK (and other) regulators’ agendas. Regulators will no doubt seek to apply what they have learned about how financial services firms are dealing with climate-related risk management to the broader set of biodiversity risks. Similar challenges are likely to be found, such as the availability of reliable and decision-useful data, the difficulties in building scenarios against which to stress test firms’ exposures, and the lengthening of the time horizon for firms’ and supervisors’ assessments of financial resilience. Similar loss pathways will also exist, such as in relation to stranded assets, exposures (e.g. to palm oil producers), changes in regulations or customer habits, falls in investment values, and loan repayment difficulties.

Boards of financial services firms will no doubt want to evaluate carefully whether there is benefit in moving now to incorporate the broader set of Nature-related risks into the frameworks they are currently developing for climate-related risks as the actions required will be the same. Firms would need to focus on data (e.g. on their customers and their supply chains and business), risk identification procedures, governance, scenario modelling and disclosures.

Global coordination will most likely also continue to pose challenges, particularly around inconsistencies in taxonomies and accounting standards. The Network for Greening the Financial System (NGFS) has made significant progress in forming a coalition of willing central Banks and supervisors, and the recent announcement that the US Federal Reserve has joined is a very positive development. But individual countries are still to some extent pursuing their own agendas, or similar agendas at different speeds.

Fiduciary duties

There is already significant regulation in train for the asset management industry on climate change, in particular in relation to disclosure. The Review seeks to go somewhat further by recommending integrating the protection of biodiversity into the fiduciary duties of institutional investors and asset managers. As similarly identified in supervisory documents, the Review notes how myopia is often a barrier to asset owners not considering sufficiently long-term investment value drivers, such as environmental issues. The Review observes that financial regulators and supervisors can play a key role in the necessary shift by changing their own assessment horizons and using their regulatory powers.

Global insurance scheme

The Review notes that because the risks from ecological degradation are positively correlated among those who are affected, there is a need for global, regional and national insurance funds. While there are some examples of regional insurance schemes for environmental disasters, there is currently no global insurance scheme. Following extreme events, there may be emergency relief at the global level. However, the level of relief is uncertain and comes after the disaster strikes. In contrast, the Review states, a global risk pool with contributions from all countries would provide security against disaster.

From a policy and regulatory standpoint, there are a number of examples of insurance and insurance-like methods applied to disaster response. Policy-makers would need to consider suitable models for a global pool to operate, for example, whether these would work on a parametric basis where the insurance is paid out based on a pre-defined event happening, as opposed to indemnifying the actual loss incurred. 


The Dasgupta Review recommends a fundamental shift in how we measure and account for economic activities, so that decisions on how to allocate resources take full account of their impact on Natural capital. The financial services industry has a critical role to play in channelling financial investments in a more sustainable direction. The Review is a call to transform our institutions and financial systems. As we approach COP15 for Biological Diversity and COP26 for Climate Change, a key question will be how Governments, central banks, regulators and the financial services industry respond.

[1] For example, the European Central Bank November 2020 Guide looks at both climate-related and environmental risks for banks, although the focus is on climate-related risks.