By Joanna Eyquem
Actuaries are increasingly recognizing nature and biodiversity as integral to financial valuation of risk and as an emerging practice area.
Hot on the heels of the CIA’s statement Integrating Nature in Climate Scenario Analysis for Enhanced Resilience, nature and biodiversity risks was a key topic at the Institute’s 2024 Annual Conference. There, Joanna Eyquem from the Intact Centre on Climate Adaptation, alongside fellow expert Geneviève Grenon of Desjardins Global Asset Management and moderator Richard Brown, FCIA, led a session that explored the critical issues surrounding this subject.
The key points from their discussion are detailed below.
What exactly are we talking about? Key definitions explained
“Biodiversity” in financial circles is often used as an umbrella term when talking about biodiversity, nature and ecosystem services. However, each of these terms is different.
Biodiversity, according to the Convention on Biological Diversity is the “variability among living organisms from all sources including, inter alia, terrestrial, and aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems.”
“Where biodiversity is life, nature is all existing natural systems, including water, earth and atmospheric processes.”
Ecosystem services are referenced as “nature’s contributions to people” in the Kunming-Montreal Global Biodiversity Framework. These services are typically considered in three categories:
- Provisioning – such as gathering wood and fish harvesting.
- Regulation and maintenance – such as flood protection and temperature regulation.
- Cultural – such as recreational or spiritual uses.
These services are provided by living and non-living elements of nature (Figure 1), and if we focus only on the living elements, we risk underrepresenting the values of services or risks.
Why consider nature and biodiversity risks, and how does this relate to climate?
The changing climate and other human activities are resulting in nature and biodiversity loss. Since private and public sector organizations depend on ecosystem services, the degradation of these services can be associated with significant financial impacts and risks that need to be managed. Desjardins Global Asset Management is using the Exploring Natural Capital Opportunities, Risks and Exposure tool to review where impacts and dependencies can be found in sectors and sub-sectors so that staff can be aware of these in investment decision-making.
Nature is a key part of both slowing down climate change (carbon storage and sequestration), as well as contributing to our resilience to climate impacts, like flooding, coastal erosion or extreme heat. We cannot really understand “natural hazards” (climate impacts) without understanding nature and how we have modified it.
To this end, the Taskforce on Nature-related Financial Disclosures recommendations are based on the “climate-nature nexus” as one of seven key principles, and they explicitly describe disclosure of opportunities for nature to contribute to climate action.
What happened at COP15? And what is the outlook for COP16?
COP stands for “Conference of the Parties.” COP15 refers to the UN Biodiversity Conference in 2021-2022, the 15th meeting of the Conference of the Parties to the Convention on Biological Diversity – not to be confused with the UN Climate Change Conference series of COPs!
COP15 ended in December 2022 with the signing of the aforementioned Global Biodiversity Framework, which has the key aim of halting and reversing biodiversity loss by 2050. The framework includes four goals for 2050 and 23 targets for 2030 – in just six years’ time.
The targets include the 30 x 30 targets:
- Restore 30% of all degraded ecosystems (Target 2).
- Conserve 30% of land, waters and seas (Target 3).
- Restore, maintain and enhance nature’s contributions to people (Target 11).
At COP16, Canada will present the country’s 2030 Nature Strategy.
There was a large financial sector presence at COP15. Private sector corporations, like Desjardins Global Asset Management, signed the Finance for Biodiversity Pledge, which includes commitment to public reporting on nature and biodiversity.
More than 200 institutional investors have also come together under Nature Action 100 to engage with companies in key sectors deemed systemically important in reversing nature and biodiversity loss by 2030. There is likely to be continued focus on these initiatives at COP16 and Quebec’s financial sector will be sending a delegation.
Why is it important to value nature and nature-related risks in financial terms?
Nature’s contributions to people are financially valuable but not routinely included in accounting and financial reporting.
In an interview with the New York Times, economist Dr Partha Dasgupta likened the fact that GDP ignores how much nature is being lost to create growth to “a football team which measures its success only on the basis of the goals it scores and doesn’t count the goals it concedes.” It is therefore not only about identifying and disclosing risks, but also on integrating the value of natural capital into everyday accounting.
Changes are already underway. The International Public Sector Accounting Standards Board is set to issue a draft standard relating to “natural resource assets” later in 2024. Statistics Canada is already compiling national natural capital accounts through the Census of Environment.
Several local governments are also integrating natural assets into unaudited disclosures. Since the public sector owns 80% of the lands in Canada, this is also likely to impact the private sector, in particular public-private interactions. We may need to think about “transition risks” in terms of transition to an accounting system that includes nature.
What role can actuaries play in assessing and managing nature risk, and in creating a nature-positive future?
Actuaries play a pivotal role in risk management. They can use this position to effectively integrate understanding of nature and biodiversity into risk management as well as incentivizing others to act and manage these risks.
Risks arise from direct dependencies on nature, such as provisioning services, as well as through impaired climate resilience, or speeding up climate change, due to changes in regulation and maintenance services caused by nature loss.
For example, from a life and health perspective, the risk of mortality and morbidity from extreme heat may be increased where there is a lack of vegetation and tree canopy to provide shade and cooling in our cities. From a property and casualty perspective, municipalities where features like wetlands, natural floodplains, and forests have been lost are likely to be more at risk of flooding and erosion.
“Actuaries can help identify the role of nature and biodiversity in determining the level of risk, as well as the impact on financial value.”
Data sources include the extent and condition of natural assets (stocks), as well as ecosystem services (flows), their monetary value and the changes in these elements over time. For those getting started, below are some key resources that may be of interest:
| Resource | Organization | Use |
| International | ||
| System of Environmental-Economic Accounting Ecosystem Accounting | United Nations | Conceptual framework for national natural capital accounting |
| Taskforce on Nature-Related Financial Disclosures | Taskforce on Nature-Related Financial Disclosures | Framework for nature-related financial disclosures |
| InVEST® (Integrated Valuation of Ecosystem Services and Tradeoffs) | Natural Capital Project, Stanford University |
Valuation of ecosystem services (several modules available) |
| Canada | ||
| Census of Environment | Statistics Canada | National register of Canada’s ecosystems, linked to national natural capital accounting |
| Specifications for Natural Asset Inventories (CSA W218:23) | CSA Group | National Standard of Canada for inventorying natural assets |
| Getting Nature on the Balance Sheet: Recognizing the Financial Value Provided by Natural Assets in a Changing Climate | Intact Centre on Climate Adaptation, Natural Assets Initiative, KPMG Canada | Review of the State of Play of natural asset management in Canada |
Moving forward: embracing nature and biodiversity in financial risk assessments
As we encourage the financial world to recognize the importance of nature and biodiversity in risk assessments, actuaries are uniquely positioned to champion this integration. By embedding natural capital into risk models and decision-making processes, actuaries can not only enhance financial stability but also contribute to a more resilient and sustainable future.
To drive this effort, it’s crucial for actuaries to engage with the latest research and resources. In addition to the resources shared above, Integrating Nature in Climate Scenario Analysis for Enhanced Resilience provides a framework for understanding these risks and their implications. Moreover, the CIA’s podcast interview with Michael Tencer, FCIA and lead author of the statement, also details how actuaries can better incorporate this variable into their work.
Sharing and discussing these resources within the actuarial community and beyond can amplify their impacts.
About the author
Joanna Eyquem is an internationally recognized leader in climate adaptation and nature-based solutions, with 25 years experience in Europe, North America and Western Africa. Her work at the Intact Centre focuses on reducing flooding, erosion and heat risk, in particular working with nature and the financial sector. As part of this work, Joanna leads the development of national guidance on climate resilience and nature-based solutions, including disclosures of natural assets and the ecosystem services they provide in financial statements and sustainability reporting.
In addition, Joanna serves on over 30 boards and committees, including supporting Canada’s National Adaptation Strategy, the Canadian Sustainable Finance Network, the TNFD Forum, Climate Proof Canada Coalition (led by IBC), the National Research Council of Canada, CSA Group, the Government of Quebec’s Expert Group on Adaptation, and as Vice-Chair of the Board for the Natural Assets Initiative.
This article reflects the opinion of the author and does not represent an official statement of the CIA.
