There is much less direct activity within finance relating to ocean and marine ecosystems than there is for life on land. However, some examples include:
- Reef insurance: Coral reefs form hugely effective barriers to protect coastlines from waves and storm surges. These coral reefs can, conversely, be damaged during extreme weather. Reef insurance pays out on a trigger event, for example a certain wind speed being measured within a defined area, to allow reefs to be rebuilt following natural disasters. This helps to protect coastal economies.
- Blue bonds: These are a subset of green bonds, where the money raised is explicitly ringfenced to fund specific activities addressing climate and environmental issues. However, the issuer of a blue bond must use the capital raised to fund ocean-related projects that contribute to at least one of climate change mitigation/adaptation, conservation of natural resources/biodiversity, pollution prevention and control. Examples of ocean-related projects include sustainable coastal and marine tourism, marine renewable energy, sustainable marine transport, and low carbon aquaculture. Issuers of blue bonds include sovereigns as well as corporates, like Ørsted in the energy sector, who financed initiatives targeting offshore biodiversity and sustainable shipping through its 2023 blue bond issuance.
- Specialist investment funds: There are some specialist funds that invest in the equity or debt of companies or real assets, with the dual objective of providing market rate returns and positive impact on the ocean and coastal habitats.
In addition to these specific actions the following are relevant overarching biodiversity activities that link to actuarial practice.
The UN’s Principles for Responsible Investment highlights that biodiversity loss creates risks for society and business that can result in significant negative economic and social outcomes. But that, conversely, by taking action against biodiversity loss provides opportunities.
The Taskforce on Nature-related Financial Disclosures (TNFD) has developed a disclosure framework to allow organisations to understand how nature loss may impact financial performance as well as to understand how an organisation impacts nature. This second part is missing from its climate-related sister framework, TCFD. Present and future opportunities are covered as well as risks. The need to address the systemic risk of biodiversity loss is on a par with climate action and, from a financial perspective, is summarised by the assessment that roughly half of the world’s economic output – US$44tn of economic value generation – is moderately or highly dependent on nature. The ultimate aim of TNFD is to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.
In the fight to limit climate change we have a defined target of net zero emissions but there is no single straightforward metric to use in the fight to reverse biodiversity loss. However, the Natural History Museum has attempted to come up with an indicator to help with assessments of the change in ecological communities in response to human pressures. The Biodiversity Intactness Index (BII) attempts to measure the percentage of the original ecological community that remains across an area – this can be measured at multiple levels: global, national, and corporate footprint. A score of 90% or more means an area has enough biodiversity to be a resilient and functioning ecosystem. Although the BII covers terrestrial biodiversity, its overall bleak picture can be translated to the marine environment. The world’s BII score was below 80% in 1970 and has been steadily decreasing since.
Another indicator of extinction risk is the International Union for Conservation of Nature’s (IUCN) Red List Index of Threatened Species, which shows that over 26% of the c.134,000 assessed plant and animal species are threatened with extinction.
The Finance for Biodiversity Pledge is a commitment of financial institutions to call on global leaders and to protect and restore biodiversity through their finance activities and investments. The website provides an overview of the different initiatives financial institutions can sign up to, to support biodiversity. They have also released a guide on biodiversity measurement approaches.
While actuaries are used to valuing uncertain cashflows, there are valid arguments why the diverse and complex systems of nature cannot and should not be commoditised and priced, which are well set out in the Friends of the Earth Europe position paper “Nature is not for sale”. The first episode of the six-part Federated Hermes Biodiversity podcast series asks questions about the valuation of nature (episode 2 covers oceans, including plastics waste and acidification from atmospheric carbon released by human activity).
The IFoA has its own Biodiversity Working Group, which works on concepts such as natural capital and valuation of ecosystem services. A summary of its initial output on biodiversity loss and this blog set out the huge scale of the issue and underlined that actuaries are well placed to consider financial impacts of biodiversity loss due to their uncertain nature. The Sustainability Board’s podcast episode on biodiversity covers how insurers are taking account of biodiversity and ecosystem services in risk assessment tools, as well as on the investment side through nature-based investment solutions. It provides the example that expected flood losses from hurricane season in the US could be reduced by $5.3bn p.a. if ecosystems along the coast of Louisiana are restored, and that this could then be reflected in insurance premiums.
The IFoA’s Biodiversity and Nature-Related Risks Policy Statement was launched in July 2023 with a webinar. New resources include an introductory guide, ‘Biodiversity and nature related risks for actuaries: an introduction’, and a summary of IFoA research and policy around biodiversity and nature risks in an IFoA Policy Briefing.
