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The Dasgupta Review

‘We’re all asset managers now’ – why the finance sector must get serious about nature

Author: ICAEW Insights

Published: 27 May 2021


The Dasgupta Review on biodiversity is unprecedented in its scope and approach. Philippa Kelly spoke with Thomas Viegas, economic advisor to the Review about the implications for the finance sector.

In 2019 the UK government commissioned the world’s first major review into the effect of declining biodiversity on the world’s economies.

“In a nutshell, the review makes clear that humanity's engagement with the natural world has been endangering our economies, our livelihoods and our well being for decades,” says Thomas Viegas, who talked to Philippa Kelly, Director, Technical Strategy Group at ICAEW about the review and its recommendations, and what it means for the financial sector (for more detail, listen to the full conversation).

“Study after study has shown biodiversity declining at a faster rate than at any time in human history,” says Viegas, “with extinction rates around 100 to 1000 times higher than the baseline, and increasing.

While these are conclusions that should worry all of us, they are not new. What sets the Dasgupta Review apart is that “the economic consequences of that have often been either overlooked or misunderstood,” says Viegas. The review highlights that “declines in biodiversity are undermining nature's ability to be productive, resilient and adaptable. And, thereby, in turn, fueling significant economic and financial risks for our economies and risks to our well being.”

The antidote to this, say the review’s authors, is to understand how economic activities both depend on and affect nature. And, as Viegas is keen to make clear, this is not just the primary industries typically appearing on videos about natural destruction but all economic activities.

They all depend on what ecologists call ecosystem services – the ‘services’ that nature provides to humanity that enable us to do anything. “The extent of the dependence varies across sectors,” says Viegas. “For example in primary industries – farming, forestry fisheries – where we extract something from nature, the link is more obvious. But secondary and tertiary industries – tourism, real estate or transportation, say – also rely on what ecologists call ‘regulating and maintenance services', such as the protection from natural hazards, a stable climate, disease control, to produce the real goods and services that they do.”

The review explains this and the economic implications of it all across its 600 plus pages. It shows how all of us should take into account the cost of using ecosystem services and how we should see natural capital as something at least as financially valuable as human or produced capital, and nurture it accordingly.

Asset management of a different kind

This means we can frame“biodiversity loss as an asset management problem,” says Viegas. “With nature as an asset, biodiversity is the diversity within those natural assets, and so is an essential characteristic that determines its productivity, its resilience and its adaptability. Just as diversity within a financial portfolio reduces risks and uncertainty associated with financial returns, the same is true for nature – greater biodiversity reduces the risk and uncertainty associated with nature's returns.”

And given we all benefit from nature, and all affect it for good or ill, “we are all asset managers,” Viegas explains, “whether it be individuals, businesses, governments, financial institutions, or multilateral organisations.” 

For those working in finance, who will have an implicit understanding of the power of good asset management, it’s important to realise, says Viegas, that “ultimately financial returns rely on nature’s returns” and understanding this “really does alter how those in finance see and engage, in terms of our economy’s relationship with the natural world.”

Making changes

Viegas hopes that by “stating the economic argument and case to act” the review will spur changes to the way we deal with a problem which has often been seen as one that’s over the horizon rather than an issue now, and yet since the early 1990s, says Viegas, we've seen about a 40% decline in natural capital per person. 

He says that, as the review makes clear, “the failure to account for nature, to account for biodiversity loss and the economic impact is a broader systemic failure to account for nature.” And just as with recent financial crises, “this isn’t just a market failure, it’s an institutional failure.”

Instead, Viegas says, there needs to be widespread and systematic accounting for nature, whether that’s risk management practices or regulation by governments. And, importantly, both the carrot of the economic case and the stick of regulation must be holistic. The natural world is an interconnected system and so all implications of our activities – whether they bolster or degrade our finite stock of natural capital – must be considered.

What this means for members

When it comes to financial decision makers, Viegas says there are three things that will help us all “to start thinking about this issue more systematically.” First, because ‘what’s not measured is not managed’, there’s a real need for comprehensive, relevant and regularly collected data to help senior decision makers understand the implications and opportunity costs of making one choice over another. 

“Measuring changes in biodiversity is inherently more complex than climate change. There’s not a single metric – we can’t just look at an equivalent for carbon emissions,” he says. Beyond this and because of the complexity, it’s also important that “the data potentially used to direct and reorient trillions of global financial capital must be based on the best and most up-to-date science.

“Chartered accountants will have a key role to help us balance the ecological books,” he says.

Second, disclosure on company activity will be key to this effort. Viegas says the review calls for “disclosure across supply chains, understanding the relationship between dependencies and impact, and building out understanding among private actors to provide consistent and transparent awareness and information to global markets.

“There’s already great ongoing work, to demand new levels of insight and transparency by investors on behalf of their investee companies, whether it comes to broader biodiversity loss, deforestation or land use.

Third, says Viegas, as with climate-related investments, new methods of “measurement and disclosure could herald the birth of a new asset class in financial markets.

“Long-standing barriers in the private market, whether that be tangible returns, readily available projects, or robust data to really scale up private investments, may become available when we have the data, effective regulation incentives. Indeed, mechanisms suggested by the Review – blended finance, pooled funds, green bonds, or broader sustainable investing – can all help us engage sustainably with nature.”

The Dasgupta Review might not be a quick or simple read but it could be one of most important publications this decade.

Listen to the full conversation.

This conversation was conducted in March 2021. Before the conversation, it was made clear that the views given were solely those of Thomas Viegas and did not represent HM Treasury or HM Government, or any other organisation’s views.

The Economics of Biodiversity

In 2019, the UK was the first major government to commission a review into the economics of declining biodiversity. We speak to the team behind the Dasgupta Review, to find out what it means for business and the profession.

Sir Partha Sarathi Dasgupta
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