Marsden, Lydia; Ryan-Collins, Joshua; Lenton, Timothy M; Abrams, Jesse F; (2024) Ecosystem tipping points: Understanding the risks to the economy and the financial system. (Policy Report 2024/03 ). UCL Institute for Innovation and Public Purpose (IIPP): London, UK.

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Abstract

Stable natural ecosystems underpin all economic activity. Ecosystems provide the natural resources needed for production; regulate climate change and global rainfall patters; and provide resilience against natural disasters and the extremes brought on by global warming. Pressures on nature from human activity - such as land use change and pollution, as well as climate change - are increasing the risk of terrestrial 'ecosystem tipping points' (ETPs): non-linear, self-amplifying and irreversible changes in ecosystem states that can occur rapidly and on a large scale. Losing these critical ecosystems will severely impact the economy through reduced food and energy security; damages to assets such as real estate; croplands and infrastructure; and health risks that impair household productivity. The direct impacts of ETPs can reverberate globally and extend far beyond the regions where these ecosystems are located, not least through the amplifying effect that ETPs would have on climate change. This means ETPs are highly relevant for central banks and financial supervisors’ understanding of how nature loss can affect the economy and financial system. The scale of environmental breakdown posed by ETPs necessitates a precautionary approach. This must focus on rapidly eliminating negative drivers to prevent thresholds being crossed ex ante, including exploring the role of the financial sector in facilitating these drivers (known as “double materiality”). Improved modelling can and should play a role, but the fundamental uncertainty associated with ETPs means these exercises are more suited for exploring risks rather than managing then. Ultimately, this approach will need to be led by governments, and requires central banks and financial supervisors to coordinate with policymakers in ministries of finance, industry and environment to fulfil their primary mandates of price and financial stability.

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