We’re seeing more and more evidence of the heavy price we pay when we damage the natural systems that sustain us. Businesses are increasingly responding to this changing reality, shifting to more resource efficient practices to reduce risks and tapping into new sustainable market opportunities. But many are also calling on governments to manage the risks more smartly across the economy, and to help businesses to adapt. Could a new ‘natural capital stress test’ be part of the government’s toolbox? WWF-UK, a member of the Natural Capital Coalition, thinks so.
A natural capital stress test (NCST) could provide the UK government with a means of systematically tracking emerging environmental risk ‘hot spots’ in the economy, pinpointing which business sectors are most at risk and why, in order to help identify the need for and to prioritise policy response.
Stress testing is already widely used in the UK’s finance sector, to test the resilience of banks to future economic shocks and, increasingly, to identify carbon-related risks. But as the UK government’s own advisors (the Natural Capital Committee) highlight, we still know little about how broader environmental trends are affecting the economy, let alone what risks this poses for specific UK business sectors.
This is a concern because all businesses ultimately depend on and have impacts on nature. And as we damage and deplete the natural systems and resources on which operations and supply chains depend – and as regulations evolve accordingly – businesses are increasingly exposed to risk.
This is why we’re working with leading consultancies AECOM and Cambridge Econometrics to develop and pilot a new NCST. We are also interested in hearing from businesses that are interested in getting involved. Ultimately, we’d like to see the UK government then adopting an NCST-type approach as part of its toolkit going forward.
Developing a UK natural capital stress test
Right now we’re exploring what a ‘fit for purpose’ NCST might look like with government and businesses. In broad terms it’s likely to resemble a framework for routinely analysing and ranking how future environmental scenarios generate risks to specific UK economic sectors, and the wider economy, based on a range of indicators (e.g. changes to GDP, productivity, jobs).
Scenarios could focus on potential future changes in UK and international natural capital assets (such as water, forests and fish stocks) and/or relevant drivers and pressures (such as extreme weather events, global warming and population growth).
Risks could be associated with acute shocks (e.g. sudden price fluctuations due to changes in resource availability) or chronic risks (e.g. longer-term environmental declines), and driven by environmental changes both in UK and overseas.
Business risks in the Anthropocene
Business leaders are rightly concerned. Environmental risk dominates the World Economic Forum’s latest Global Risks Report 2016 for the first time. Climate change is also driving multiple other risks including water crises, food shortages and involuntary migration. These are unprecedented headlines for WEF and it make for scary reading. And future-proofing UK Plc against these trends is a conversation we’ve barely started.
So great are the changes we’re wreaking on the world that scientists say we’ve entered a new geological era – the ‘Anthropocene’. Last month, WWF launched its 2016 Living Planet Report, which painted a shocking picture of the scale and pace of change: a 58% reduction in global wildlife populations between 1970 and 2012, and a predicted decline of 67% by 2020 unless we take action.
UK businesses are not immune. And the risks to UK businesses are not limited to what happens within these shores. Research shows that most environment-related business risks (60%, on average, in one study) are embedded within international supply chains. From extreme flood events and soil erosion, to water shortages and overuse of timber and fish stocks – in today’s globalised world, what happens in Brazil, Indonesia or the South Pacific is increasingly affecting UK Plc.
Role of HM Treasury
With its primary objective to maintain a productive and resilient economy, HM Treasury could find a NCST especially useful – and we’re delighted to have them involved in the project.
By revealing the economic implications of nature’s decline, a NCST would help HM Treasury to better understand how reversing the loss of natural capital could help it to meet its departmental objectives, as well as those of others. This, in turn, could help its drive towards a smarter economic policy-making agenda based on longer-term, integrated and preventive approach. The UK’s National Audit Office has already called for such improvements, which are arguably crucial for any credible, sustainable and resilient economic strategy in our rapidly changing world.
Updated each year, a NCST could also feed into the UK’s annual budget and infrastructure planning processes – all areas in which HM Treasury will need to pull levers to help UK Plc to adapt. WWF-UK has long-argued that the budget should report on natural capital and related risks, and take this evidence into account when setting policy priorities, tweaking economic incentives and allocating public spend.
A NCST could also support policy-making in other departments (and HM Treasury’s engagement in these). For example, the government’s forthcoming 25 Year Environment Plan (led by the Department for Environment, Food & Rural Affairs) is expected to put emphasis on greater use of market-based measures to tackle natural capital issues, which HM Treasury needs to advise on.
The government has also pledged to think long-term as it develops its new Industrial Strategy (led by Department for Business, Energy & Industrial Strategy). This may be another good opportunity to future-proof key industry sectors against environmental risks, and to ensure that future investment reduces rather than exacerbates them (e.g. by incentivising more sustainable sectors and in ‘green’ infrastructure).
Business case for natural capital stress testing
Many businesses, including WWF-UK’s corporate partners, are taking action – reducing risks and capturing new opportunities by investing in resource/energy efficient practices, entering new sustainable markets, and partnering with other stakeholders to help safeguard the natural assets that support their operations.
However, it’s also clear that many businesses could (and would like to) do a lot more. A NCST could generate evidence that -if shared, and we hope it would be- would help at risk sectors to see what is coming down the tracks, complementing any existing company risk assessment efforts.
It would also help tackle a major barrier to business investment in risk mitigation – that of weak or inappropriate policy incentives that undermine the business case for sustainability. A NCST would do this by strengthening the case for government intervention – through targeted regulation and economic measures to, for example, help businesses adapt and become more sustainable, and discourage economic activities that damage the natural asset base on which all businesses depend.
Clearly there will be winners and losers. But levelling the playing field in this way is arguably a key step towards addressing what some call the “resilience imperative”. It is also a good way to nurture the kinds of businesses that will prosper and help UK Plc to compete in a resource and carbon constrained world.
Calling on UK businesses leaders
We always welcome conversations with businesses that want to do more to address natural capital issues and risks, both within their own operations and by influencing government policy.
We are also interested in hearing from UK-based businesses, with or without overseas supply chains, that are interested in shaping our stress testing project (e.g. via attendance at a workshop to discuss/refine the approach).
Get in touch
For further information about this work or to get involved, please contact me: firstname.lastname@example.org.
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