The Biodiversity Challenge

by | July 24, 2021

Most readers are familiar with two mega global challenges—the US vs China superpower rivalry, and climate change. Yet a third hurdle may prove even more daunting—the threat that population growth and economic expansion may overwhelm nature, leading to a biodiversity collapse. That threat is real and present, it requires our immediate attention. Economists can help, through the statistics we produce, the advice we give to organisations and governments, and the tools we offer to analyse and address externalities. All can contribute to better decision making.  

Ahead of the UN climate change conference in Glasgow later this year– COP26—all eyes are focused on slowing global warming. Attention is considerable, even the Pope may attend. The good news is that tools are being rolled out to deal with climate change, including more appropriate carbon pricing, investing in renewable energy sources, or improving national standards. 

Our biosphere deserves similar attention, yet it is not. Our collective actions are destroying the planet and making it less habitable. 

To offer examples: 75% of the Earth’s land surface has been significantly altered by human actions. 66% of the ocean area is experiencing multiple impacts including over-fishing, pollution, and acidification. The World Wildlife Fund’s Living Planet report showed an average decrease of 68% in wildlife population sizes between 1970 and 2016. 

Our living standards—indeed our ability to live at all—is dependent on a viable biosphere. Without pollination food production will wither. Without clean air and water, humans and the life we depend on will suffer or even disappear. Nature is critical for the successful delivery of 14 of the 17 UN’s Sustainable Development Goals, such as food security, health, livelihoods, jobs, water security, the ocean, climate change, and disaster prevention. 

All these issues will be considered at COP15, namely the 15th meeting of the UN Convention on Biological Diversity which will take place in Kunming, China, in mid-October. Distressingly, however, none of its 20 targets are being achieved. 

This is not a new topic for readers of Jackson Hole Economics. Last December, Robin Smale from Finance for Biodiversity examined how regulators and financial institutions could begin to address some of the issues. In February, Diane Coyle wrote about the Dasgupta report, which cogently argued that a country’s natural assets should stand alongside human and productive capital as essential to accounting for living standards. Her valid critique of how GDP is constructed augments recent work by authors such as David Pilling and Mariana Mazzucato. The limitations of national income accounting, for example in the calculation of GDP, ought to be addressed by economists to account for the value of nature and the cost of externalities that compromise its contribution to our well-being. 

The elephant in the room is population. In 1950, the planet was home to around 2.6 billion people. It reached 5 billion in 1987, 6 billion in 1999, 7 billion in 2011, is about 7.7 billion today, and will reach 9.7 billion by 2050. Rapidly rising population in emerging economies, especially Africa, overwhelms slower population growth, even declines, in the USA, China and Europe. 

What sort of lifestyle can be offered? The World Counts website estimates that humanity is currently using the equivalent of 1.7 times the Earth’s resources. Put another way, “Earth Overshoot Day” on July 29th will mark when humanity demands more this year than the planet’s ecological capacity. We are living beyond our means, never a sustainable outcome. 

Yet the miracle of humanity is its ability to respond and change. Apocalyptic projections ignore human ingenuity and adaptability. The biodiversity crisis does not mean we need to fall into Malthusian pessimism. 

How can economists contribute? Returning to their roots would help. Economics is not neutral in terms of value judgments. Its roots are in Philosophy and Political Economy. Adam Smith famously wrote about Moral Sentiments, not merely the Wealth of Nations. A much greater emphasis on externalities can also help. Statistics can be dangerously misleading and markets prone to failure when true costs are omitted.

Economists working in the public sector could take such steps as promote the rapid introduction of sustainable GDP measures, explicitly incorporate ‘green’ measures in public sector project appraisals and enhance family planning in overseas aid budgets. Some initiatives are underway, for example, the UK’s Natural Capital accounts or New Zealand’s Environmental Economic Accounts. 

Economists in the private sector can encourage businesses to move beyond net zero carbon commitments toward reducing total environmental footprints. Early examples of partial mitigation include Amazon spending $10 million to restore 1.6 million hectares of forest in the United States, or Nestlé investing in forest restoration in Ghana and Côte d’Ivoire. 

Economists who work for think tanks have the opportunity to push for carbon taxes, emission trading systems, cuts in agricultural and fossil fuel subsidies, and a revamping of regulations or permits that promote harmful land and resource management. 

Economists in financial services ought to promote thinking about the growing risk for their institutions and clients of ‘stranded assets’, defined as holdings in sectors that must shrink as the world shifts toward biodiversity and climate sustainability. Regulatory pressure is growing: the Task Force on Climate-related Financial Disclosures, which has been instrumental in mainstreaming climate risk via stress testing for banks and insurers, has been joined by an equivalent Task Force on Nature-related Financial Disclosures, with its first report scheduled for next year.

Macro-economists should encourage less emphasis on GDP as the arbiter of national welfare. Instead, they should develop broader measures of wealth, such as balance sheets of social, environmental and economic assets. For example, would a ‘true’ measure of Brazilian GDP rise owing to greater soya output at the expense of deforestation? 

The sums involved are far from trivial. Statistics in the Dasgupta Review indicate that since the early 1990s, produced capital per person has doubled and human capital per person has increased by about 13% globally, but the stock of natural capital per person has declined by nearly 40%. No amount of technological progress can create sustainable expansion in living standards against that background. 

The economy is underpinned by, not external to, the environment we enjoy. Economists can do more to educate, inform and advise households, businesses, and governments about how to respond to the looming environmental crisis of biodiversity loss. 

To quote David Attenborough “economics is a discipline that shapes decisions of the utmost importance and so matters to us all. By bringing economics and ecology together we can save ourselves”.

About the Author

Andrew Milligan is an independent economist and investment consultant. He is a Board member of the Asia Scotland Institute, an adviser to the Health Foundation, to Balmoral Asset Management and to the Educational Institute of Scotland, and a Fellow of the Society of Professional Economists. From 2000-20, Andrew was the chief market strategist for the global fund manager Aberdeen Standard Investments.

After graduating from Bristol University, Andrew started in H.M. Treasury where he specialised in the IMF and World Bank’s handling of the Latin American debt crisis. He then worked in turn for Lloyds Bank, the broker Smith New Court, and New Japan Securities as an international economist. In 1995 he entered the asset management industry, becoming Head of Economic Research and Business Risk for Aviva Investors. In 2000 he moved to Edinburgh to work as the Head of Global Strategy for Standard Life Investments, in charge of a team covering economic and market research, tactical and strategic asset allocation decisions, client advice and communications for retail and institutional clients globally.

After its merger with Aberdeen Asset Management to form Aberdeen Standard Investments, the company became the second largest active fund manager in Europe with over 30 offices across the major financial centres. Andrew is well known as a public speaker while his writing, commentary and interviews have appeared in all the mainstream media.

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