Ortec Finance works with Duke University to take first steps to incorporating Ecosystem Services Loss in financial climate risk modelling

Ortec Finance seeks to understand how losses in biodiversity and ecosystem services impact the productivity of economic sectors and, by extension, the financial performance of these sectors.

Our Climate & ESG Solutions team has partnered with Duke University’s Master of Environmental Management (MEM) professional students —Sam Vanasse, Max Hermanson, Mingyi Chen, and Yifan Wang, in helping us flesh out a proposed answer to this challenging question.

Duke University’s Nicholas School of the Environment (NSOE) seeks to “to restore and preserve the world’s environmental resources while adapting to a changing climate and a growing population”. Because of this, the Climate & ESG Solutions team is pleased to have partnered with Duke’s professional environmental students for several years to disentangle how the most cutting-edge scientific research can be applied in practice to best advise our clients on climate risk, opportunity, and impact.

The aim of this research is to better understand the most scientifically sound, yet practical way to measure the effect of Biodiversity and Ecosystem Service (BES) losses on the economy—the scope of the project is narrowed down to examine the impact of ecosystem services loss to GDP, without accounting for other value ecosystem services provide such as intrinsic value.

Findings from Study

• Developed countries & Europe are affected by BES loss through the dependence on ecosystem services throughout their supply chains— rather than impacting direct production lines within developed countries.
• Brazil, China, and India have moderate to high direct GDP dependency on BES.
• BES loss poses an enormous threat not only to the stability of the environment, but also to the continuity of businesses and society.
• Soil fertility and pollination are two of the most fragile ecosystem services examined within this study. Their fragility poses a large threat to food security.
• The sectors that are most affected by BES losses as examined in this study are agriculture, mining & quarrying, and manufacturing.
• The economic risk of BES loss is often underestimated in existing models because of the complexity of modeling ecosystem services (limited data availability), and the overestimation of the ability to substitute ecosystem services with man-made solutions in equilibrium economic models.

Recommendation

Based on this preliminary study, we find that the quantification of ecosystem services remains a lofty and challenging task. While some models and literature exist, we find that such models may be undervaluing and oversimplifying the impact of ecosystem services loss. Further, ecosystem services are seen as just a part of the biodiversity puzzle. The scope of this master’s thesis is even smaller still, only capturing the impact of BES losses on GDP. Nevertheless, the work done allows us to set first steps in capturing financial risks associated with BES both quantitatively and qualitatively in our scenario narratives.

Most concretely the research conducted strengthens our choice for a more conservative non-linear damage function when seeking to capture the impacts of temperature rise on economic performance. Experts continue to debate which loss function to use within climate scenarios. At Ortec Finance, we find that using a more conservative non-linear damage function is a more realistic way forward.

Learn more about our Climate Scenario Analysis Solution - ClimateMAPS