Peter Thomson
UN Special Envoy for the Ocean
Businesses depend on ecosystem goods and services for their operations; communities depend on the ocean for their livelihoods, their food and their ways of life. In our lifetime, however, the ocean is expected to reach thresholds of abrupt change (“tipping points”) from human impact. These changes will be irreversible and will impact those that depend on the ocean.
While not all changes can be mitigated after years of over-exploitation of ocean resources, there is still time to turn the tide. We need to ask ourselves: how can we achieve social, economic and financial resilience if we erode the resource base on which we depend?
This ground breaking research shows that a business-as-usual trajectory entails great risk to our economies, with a cost potentially reaching up to US$8.4 trillion over the next 15 years.
But the ocean also has a great capacity to regenerate. If we take immediate action, we can reduce this damage to US$3.3 trillion.
By repairing damage to the ocean, we revive one of the world’s greatest resources and one of the world’s largest carbon sinks.
"Getting to a net zero economy is absolutely fundamental to ending the cycle of decline in which the ocean’s health has been caught."
Source: sdgs.un.orgBut we must act now.
Summary
The ocean is being impacted by human activity, which is fast changing how ocean-dependent businesses operate within it.
Human impacts have been accelerated by the changing global climate, putting both industries and those that invest in them at risk. We need fast action from all businesses, governments and financiers if we are to realise positive change and avoid losing trillions over the next 15 years.
This study, commissioned by WWF, demonstrates what we have to lose if we continue to invest in and incentivise business as usual (BAU). It also shows what we could gain if we choose to invest in more sustainable business models that safeguard ocean resources.
Our method is designed for financial institutions to identify where business is most dependent on a healthy ocean. It helps financiers assess potential future value at risk to portfolios from a changing global ocean.
Who we are
WWF has decades of experience in ocean conservation, with more than 500 practitioners across 60 offices. We work in partnership with communities, businesses and governments to restore ocean health for the benefit of people and nature.
This project is one of WWF’s contributions to the Ocean Risk and Resilience Action Alliance and part of the WWF Blue Futures Initiative, that aims to redirect mainstream finance toward sustainable development pathways for the restoration, protection and sustainable management of the ocean.
WWF has partnered with Metabolic, the environmental modelling and systems change experts, who use data-driven solutions and systems thinking to tackle global sustainability challenges.
What we did
We have created an innovative, first of its kind model and dataset to assess how financial risks arise cumulatively in the blue economy.
We modelled the impacts and dependencies of businesses operating in six blue economy sectors – coastal real estate & infrastructure, fisheries, aquaculture, ports & shipping, tourism, and marine renewable wind energy – to physical and transition risks over the next 15 years.
We applied two future scenarios
Business as usual (BAU)
Where we continue with current climate, environment and business practice
Sustainable development (SD)
Where business, finance and policymakers take efforts to align with international environmental commitments
We then created a methodology for investors to quantify financial risk (“value at risk”) to more than 8,000 listed equities in these sectors and provided an estimate of aggregated potential value at risk at the global level.
What we found
US$8.4
trillion at riskThe cumulative value at risk to these sectors if we continue with business as usual
66%
exposedThe globally listed companies with some dependence on the ocean economy
Many sectors have varying exposure to environmental, climate, physical and transition risks. Our method encourages investors to couple this data with their own company-level data. This is important where data is sparse, as is the case for the ocean.
What we must do now
The methodology is designed to be used for the global investment portfolios of large asset owners, but the results are relevant to a wider group of stakeholders: insurance, reinsurance, credit providers, asset owners and managers, holders of sovereign debt, governments and financial regulators.
Approach
A systems approach can measure the interdependencies of multiple stakeholders under complex conditions.
In 2019, we conducted a portfolio-level pilot assessment of value at risk in the Baltic Blue Economy with a large insurance and pension company investing in the Baltic region. We have built on this pilot to develop a global model that uses science-backed data on value at risk to the global blue economy in six global blue economy sectors.
Building a systems model
Changes in the environment or climate can impact the ability of business to operate effectively. But mapping such impacts is challenging, especially in the ocean where data is limited and where maritime industries depend on shared resources.
We created a bottom-up “system dynamics” model to map drivers, pressures and interdependencies in the blue economy – quantifying how businesses impact on the environment, how it impacts on them, and how they impact on each other. The data is now publicly available on request.
Quantifying value at risk
“Value at risk” is a measure of financial risk showing the amount of loss a portfolio could sustain over time. The outcome was a first-of-its-kind value at risk (VaR) model to show the risk to the blue economy under different physical and transition risk scenarios.
Scenario analysis
We used two future scenarios (“business as usual” and “sustainable development”) over a 15-year period.
Business as usual (BAU)
Global business and investment communities continue along the IPCC’s 8.5 RCP scenario, where no efforts are made to manage the negative impact of climate change and environmental exploitation in the blue economy; investment-as-usual continues along the existing growth path.
Sustainable development (SD)
The investment, business and policy community start to ramp up efforts to align with international climate and environmental commitments, following an intermediate IPCC emissions scenario of RCP 4.5, while additionally reducing environmental impacts of exploitation, pollution and habitat change.
Value at risk to globally listed companies
We applied the estimates of value at risk to the MSCI ACWI IMI Index, covering approximately 99% of the global equity investment opportunity set. The MSCI ACWI IMI captures large, small and mid-cap equities in developed and emerging markets.
Risk exposure was calculated using the global industry classification standard system, known as GICS. An exposure estimate was derived for companies within blue-economy sectors.
Findings
US$5.1 trillion could be saved if we transition to a more sustainable blue economy.
We found that 66% of global listed companies could be exposed to value at risk of up to US$8.5 trillion over the next 15 years if we do not take action to secure a sustainable ocean economy.
For almost all sectors the absolute risk to assets and revenues is reduced under a more sustainable scenario, amounting to US$5.1 trillion in savings. This value at risk accounts for about 3% of the total value of the blue economy.
“A healthy and resilient ocean is vital for long-term economic resilience. At COP26, governments have an opportunity to boost both public and private investment in a sustainable blue economy that underpins a net-zero, nature-positive future. Our new analysis shows that acting now to put sustainable ocean finance at the heart of responsible, low-carbon investment could save US$5 trillion, and set a course for lasting prosperity.”
Maritime businesses operate in shared waters, where environmental management practices are more difficult to enforce. Sharing unregulated resources can incentivise short-term gains over long-term benefits for communities and the environment.
Our model shows that, if we continue on this path, there is significant value at risk to global businesses even in the medium term, despite most damage from climate change arising from mid-century.
If we align behind the international scientific community’s call to action on climate and the environment, however, we can reduce the potential losses by over US$5 trillion – more than the current GDP of the United Kingdom.
US$8.4
trillion at risk (BAU)US$3.3
trillion at risk (SD)Even if we transition to a more sustainable development scenario, currently unavoidable climate change impacts put our economies at risk. This reiterates how important it is to keep global temperature rise below 1.5℃.
Investors should therefore engage companies on their risks and work with them to improve their resilience. Company-level and geographic data can be added.
Potential value lost
Business as usual (BAU)
Sustainable development (SD)
Potential value saved
The total cumulative savings in each blue economy sector if we were to transition to a sustainable global model.
Value saved per sector (SD)
The risks identified in this model are rarely, if ever, priced into the value of assets, even for asset-heavy industries like coastal infrastructure. The results should be read cumulatively rather than sector by sector.
Asset-heavy industries are most vulnerable to the physical risks of climate change and would benefit most from mitigating climate-related impacts by reducing greenhouse gas emissions, but also by ensuring protective natural barriers are restored.
More sensitive industries like fisheries and aquaculture would additionally benefit from mitigating pollution, and reducing biodiversity loss, disease transfer and erosion of natural habitats.
Sectors at risk
Human impacts on the blue economy accumulate over time, and can impact business operations.
While the risks to these sectors should be taken cumulatively, we break down the model results below for the business as usual (BAU) scenario and sustainable development (SD) scenario after 15 years.
COASTAL REAL ESTATE AND INFRASTRUCTURE
US$3.98
trillion at risk (BAU)US$854
billion at risk (SD)A growing population of nearly 2.4 billion people lives within 100km of the coast. Most are dependent on transport routes, services and functional supply chains for food, basic services and materials. Coastal infrastructure is, however, emissions-heavy and can be destructive to natural storm buffering coastlines, environmental ecosystem services, biodiversity and fisheries productivity.
Climate-related risks cause most damage to coastal real estate and infrastructure. Storm surges and other physical damage from extreme weather events are the greatest risk to these areas. Such events have already cost the European Economic Area over €446 billion since 1980.
FISHERIES
US$2.85
trillion at risk (BAU)US$1.9
trillion at risk (SD)About 25% of the total value of assets and revenues of wild-catch fisheries may be at risk. Overexploitation is a major driver of falling fishery productivity, which is aggravated by climate change, but also impacts of other industries, like pollution from shipping or habitat conversion from coastal infrastructure. While the model looks at producer-level impacts, this has knock-on effects down the food retail supply chain.
AQUACULTURE
US$31
billion at risk (BAU)US$28
billion at risk (SD)Aquaculture is vulnerable to productivity losses from ecosystem services, habitat conversion, genetic biodiversity loss, and pollution. It is also dependent on feed from wild-catch fisheries, or from oil crops like soy that are linked to deforestation of biodiverse rainforests and savannahs. The sector is known to drive the spread of invasive species and diseases. One estimate puts losses from disease alone at about US$6 billion per year.
While aquaculture is growing faster than commercial fish landings, there are large data gaps. One of the biggest barriers to sector change is the lack of transparent records on how environmental harm leads to revenue loss.
PORTS AND SHIPPING
US$874
billion at risk (BAU)US$52
billion at risk (SD)Shipping emits significant greenhouse gases and pollutants in the water and air, emitting 1 billion tonnes of CO2 into the atmosphere each year. It is also heavily destructive to natural ecosystems.
As major players in the global energy industry, these sectors are sensitive to climate-related policy changes and changing energy markets. As they are infrastructure-heavy, they are also exposed to physical damage from extreme weather events.
COASTAL TOURISM
US$655
billion at risk (BAU)US$451
billion at risk (SD)Tourism contributes about 10% to global GDP. A large proportion of tourism is based in coastal areas, where natural ecosystem intactness is a key attraction. However, poorly managed tourism and dependency on fast growing coastal infrastructure can also degrade these systems.
If we also consider the opportunity costs from loss of recreational fishing opportunities, an additional US$432 billion could be at risk over 15 years.
MARINE RENEWABLE ENERGY
US$8.6
billion at risk (BAU)US$22.8
billion at risk (SD)The value of marine renewable wind assets is estimated to be 3-4 times larger under a more sustainable scenario. This means there is more value seemingly at risk. However, the relative value at risk per dollar invested is still less for the sustainable scenario.
As per all asset-heavy industries, marine renewable wind energy is particularly exposed to risks from climate-related impacts over 15 years. Although the full benefits of the green transition are not evident in this model due to the short timescale, investing in renewable energy will decrease the risk of climate change to all sectors in the long run.
Favourable policy and market incentives are also making this sector increasingly more viable and safe for investors.
Risks to biodiversity may occur during the construction phase of wind turbines, but, if left undisturbed, renewable energy poses less of a threat to biodiversity than other sectors like mining, oil & gas.
Recommendations
To transition to a sustainable “blue” future, all stakeholders have a role to play, and financial stakeholders are at the heart of this.
This report demonstrates that, even in the short term, there are trillions at risk if we continue with business as usual. There are also substantial financial benefits to aligning portfolios with the Paris Agreement and managing the impacts of exploitative industries on our ocean. Keeping global temperatures below a rise of 1.5℃ will further help to mitigate these impacts.
Call to action for financiers and regulators
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Adopt and implement the Sustainable Blue Economy Finance Principles and associated UNEP FI Guidance.
The Sustainable Blue Economy Finance Principles and UNEP FI Guidance exists to support investors to make investments that are directed towards sustainable development. Investors should encourage investee companies to address the risks and impacts of their operations. Sector-by-sector guidance for investors is provided at the following links:
- Fisheries & Aquaculture
- Ports
- Shipping
- Marine and Coastal Tourism
- Marine Renewable Energy
- Coastal Real estate (coming soon)
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Integrate environmental considerations into financial risk assessments.
Climate risks are now increasingly recognised as financial risks, although decades of evidence gathered by the scientific community should have prompted this movement much earlier. Financiers, governments and regulators must address impacts that cause risks to the blue economy and incentivise companies to take action.
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Seek out and pilot risk-based models and approaches to inform sustainable development pathways.
This model offers a unique methodology and data-collation effort to begin to assess complex risks across the global blue economy. Financiers can also adopt their own approaches to assessing such risks, using science-based methods.
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Prioritise and implement transparent risk and impact disclosures.
Efforts to report on nature-related risks and impacts need to be accelerated in complex areas like the ocean. Measuring and publicly reporting on efforts to manage nature risks and impacts is vital to enabling action.
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Drive the creation of credible, science-based information.
Current ESG-related risk assessments and mainstream industry activity classification systems are not sufficient to identify and monitor environmental risks and ensure that credible data is being collected. Greater levels of granularity are needed to clearly distinguish blue economy sectors.
The precautionary principle should apply to investment decisions made in data-poor situations.
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Create an enabling environment that promotes broader changes in the way we do business.
Financiers and corporates should call for governments to implement stronger safeguards to shift business towards sustainable models. They should engage their investees, suppliers and clients and request relevant data. Governments can respond by incentivising this critical shift.
In this way, we can start to move towards a more sustainable, “blue” future.
VALUE AT RISK IN THE BALTIC BLUE ECONOMY
Go to 2019 Pilot study
LAUNCH EVENT: DON'T GET STRANDED - NAVIGATING OCEAN RISK TO BUILD A SUSTAINABLE BLUE ECONOMY