In recent years, progress has been made in establishing frameworks to evaluate the financial and operational risks posed by climate change. More companies are now engaging in climate-related risk analysis and reporting, and regulatory bodies are increasingly mandating these practices.
However, amid this progress, a crucial aspect requires further attention: nature-related risk.
Michael Tencer, FCIA and lead author of the new CIA’s statement Integrating Nature in Climate Scenario Analysis for Enhanced Resilience, explains, “Including nature risk in climate scenario analysis is crucial for prudent financial risk management. Ignoring biodiversity loss and ecosystem degradation leaves a significant gap in understanding the full spectrum of risks.”
Defining nature risk
Nature risk, as defined by the Taskforce on Nature-related Financial Disclosures (TNFD), encompasses the potential negative impacts on organizations and society stemming from dependencies on nature.
Similar to climate risk, nature risk can be categorized into physical, transition and liability risk. These risks manifest as financial losses due to the physical depletion of natural capital and the transitions required to mitigate such losses.
Why nature risk matters
The degradation of ecosystems and the loss of biodiversity are accelerating at an alarming rate. The UN Conference on Biological Diversity (COP 15) in December 2022 set international targets to address these declines, which are influencing policymaking globally, including in Canada. These changes carry significant financial implications for both organizations and governments.
It is crucial for industries and regulators to understand and address the consequences of nature risk. Businesses depend on nature for resources and ecosystem services, such as water filtration and pollination, with their own activities impacting nature. By managing their environmental footprint, businesses can reduce their inward nature risk over time.
Malika El Kacemi-Grande, FCIA and co-author of the statement, explains “As Canada [and other countries] implement the 2022 Kunming-Montreal Global Biodiversity Framework, the transition and liability risks from policy changes will escalate. It’s vital that we act now to mitigate these risks and safeguard our financial system.”
Integrating nature into climate scenario analysis
To achieve a comprehensive understanding of the challenges and opportunities we face, nature risk must be considered alongside climate risk in scenario analysis, which is an evaluation of the impact of potential future events.
Scenario analysis can be used by individual companies to manage their exposure to nature loss as well as to raise awareness of their impact on nature. It can also be used by regulators to analyze the systemic impact of policy decisions.
A climate risk scenario analysis framework that does not consider nature is insufficient in preparing for the future.
The path forward
We urge all climate risk stakeholders to integrate nature risk into their frameworks. This involves not only conducting scenario analyses to manage exposure to nature loss but also raising awareness about the impact of business activities on nature.
Key actions include:
- Learning about nature risk concepts.
- Staying informed about developments in this area.
- Communicating the importance of nature risk to other industry stakeholders.
Harry Li, FCIA and co-author of the statement, stresses the collective responsibility of financial and regulatory leaders to champion the inclusion of nature risk. “It’s about ensuring that all stakeholders understand its importance and stay informed about ongoing developments.”
Explore nature risk with the authors
Our latest podcast episode on Seeing Beyond Risk explores nature risk with Michael Tencer. In this exclusive interview, Michael details what nature risk can entail and how actuaries can better incorporate this variable into their work. Hear even more in the French-language episode with co-author Malika El Kacemi-Grande.
Our role as actuaries
Only by considering nature risk alongside climate risk can we equip the Canadian financial system to face future challenges and seize opportunities effectively – as actuaries, we are the risk experts that can guide institutions through the multifaceted risks of our changing environment.
