Natural Capital Risk

Chapter 6 Natural capital risk 89 A country´s wealth is determined to a significant extent by its stock of natural capital. Disaster risks include the loss and erosion of natural capital with potentially serious consequences for business, households and a country’s wealth. Globalisation is not only modifying risk patterns through increasing hazard exposure and vulnerability, but also through climate change. Along with climate change, environmental degradation, deforestation and the over-exploitation of natural resources all result in increased risks to natural capital. For example, wild-land fires now affect all continents with the cost of damage to tropical ecosystem services alone potentially exceeding US$3 trillion per year. Land degradation is a key driver of agricultural drought risk. Large areas of Africa, the Arab and Mediterranean regions are experiencing both land degradation and high levels of soil moisture deficit leading to a potentially irreversible loss of natural capital. The scale of direct losses and indirect impacts from agricultural drought is still poorly understood but potentially significant. But inno- vative new probabilistic models of agricultural drought risk are now providing a clearer picture of potential crop losses at the country level and can be related to relevant economic indicators. time because the exhaustion of natural capital com- 6.1 Natural wealth promises the wealth of future generations. A country’s wealth is also dependent on its stock However, although risks to produced capital are of natural capital. A country with a declining now modelled with increasing accuracy, the estima- base of natural capital is unlikely to achieve a tion of natural capital risks is still in its infancy. As sustainable increase in wealth. such, both costs to business as well as shared risks are rarely factored into investment decisions. The Natural capital is understood as a set of renewable sections that follow will explore some of the drivers and non-renewable natural resources, including agri- of natural capital risk, including climate change, cultural land, fisheries, fossil fuels, forest resources, land degradation, and the impact of wild-land fires water, biodiversity and minerals. Apart from flows and agricultural droughts. Chapter 10 in Part II of into produced capital, business investment also flows this report will build on this analysis and explore the into other sectors, such as agribusiness, forestry and role of agribusiness in food security risk. mining, in countries with abundant natural capital. Whether these investments pose risks to natural capital needs to be assessed and understood. Global warming Risks associated with natural capital may affect The ultimate risk transfer: businesses as well as other social sectors in the 6.2 global climate change same way as disaster risks associated with produced capital. With natural capital, many risks gen- Globalisation is not only modifying risk pat- erated through business investments are exter- terns through increasing hazard exposure and nalised and transferred through mechanisms such vulnerability, but also through climate change. as climate change, land degradation and the overexploitation of water resources; in the long term, Since the beginning of the industrial revolution in these become shared risks not only in space but in 1750, the atmospheric abundance of the three 90 Part I - Chapter 6 principal greenhouse gases—carbon dioxide, meth- energy production, transport, agriculture and ur- ane and nitrous oxide—have increased by 39 percent, banisation are also critical. And as this chapter 158 percent and 20 percent, respectively (WMO, highlights, other factors such as wild-land fires, 2011). which are often associated with deforestation, also make critical contributions. As Box 6.1 shows, increasing greenhouse gas con- centrations in the atmosphere modifies climate, al- For more than a century, high-income countries though uncertainties remain regarding the reper- have been contributing to these emissions. How- cussions in weather and climate-related hazards in ever, as a consequence of economic globalisation, different regions (IPCC, 2012). many low and middle-income countries are now becoming large greenhouse gas (GHG) emitters. Increased combustion of fossil fuels, deforestation Given that climate change modifies climate and and land-use changes are directly linked to the weather-related hazards, it becomes the ultimate capital flows and investment decisions of the past mechanism of global risk transfer and of generat- and to growing green-house gas emissions in the ing shared risks. It represents the privatisation of present and future. Industry contributes directly benefits that accrue from present investment at and indirectly about 37 percent of global green- the expense of future losses that will surface from house gas emissions, and these have increased by climate change later in this century. It also repre- 65 percent since 1971 (Worrell et al., 2009). Produc- sents a transfer or export of disaster risk from tion of energy-intensive industrial goods, in partic- countries responsible for the majority of emissions ular, has increased dramatically since 1970 (ce- to those that have fewer emissions but will see ment, by 336 percent; aluminium, by 252 percent; their disaster risks increase. Figure 6.1 compares steel, by 95 percent; ammonia, by 353 percent; and the ratio of GHG emissions with expected losses paper, by 190 percent) (Ibid.). But emissions from from cyclonic wind damage. Many countries with Box 6.1 Special IPCC Report appraises and addresses future climate extremes The Special Report of the Intergovernmental Panel on Climate Change presented the latest results from current research on climate change. The more science progresses in the field, the more it is possible to produce analysis that can delineate future climate patterns with higher degrees of confidence. Main conclusions of the report include the following: Virtually certain Substantial warming in temperature extremes by the end of the 21st century. Very likely Mean sea level rise will contribute to upward trends in extreme coastal, high water levels. Likely Increased frequency of heavy precipitation or the proportion of total rainfall from heavy falls will increase in the 21st century over many areas of the globe. Increase in tropical cyclone maximum wind speed, though not in all ocean basins. High confidence Changes in heat waves, glacial retreat and/or permafrost degradation will affect high mountain phenomena such as slope instabilities, movements of mass and glacial lake outburst floods. Many glacier- and snow-fed rivers will experience increased run-off and earlier spring peak discharge. Medium confidence Reduction in the number of extra-tropical cyclones averaged over each hemisphere. Droughts will intensify in some regions, including southern Europe and the Mediterranean, central Europe, Central North America, Central America, Mexico, north-east Brazil and southern Africa. (Source: IPCC, 2012) 91 Figure 6.1 Losses from cyclonic wind compared with greenhouse gas emissions (Source: UNISDR, based on World Resources Institute (*)i) low emissions will also face high costs from sea level rise. 6.3 Unsustainable risks Today, a familiar tendency is to assign the causality Environmental degradation, deforestation and of all weather-related impacts to climate change. overexploitation of natural resources all result In reality, at least over the next two to three de- in increased risks to natural capital. The nega- cades, increasing hazard exposure and vulnerabili- tive impacts of weather-related disasters fur- ty associated with economic and urban develop- ther erode the natural capital base of nations, ment will have a greater influence on disaster risk reducing their overall wealth and competitive- than climate change (IPCC, 2012; UNISDR, 2009 ness. and 2011; Nicholls et al., 2008; Swiss Re., 2011a). Climate change will have a disproportionate influ- There is growing interest in quantifying the value of ence on economies most susceptible to weather- natural capital and the consequences of its loss to related risks, however (IPCC, 2007). Many of these national economies.ii The wealth of a country is the countries depend heavily on climate-sensitive nat- sum of produced, human and natural capital. As hu- ural capital, such as land, water and forests. man capital increases, although total wealth increases, natural capital is likely to be depleted and One climate change outcome, which the IPCC has thus wealth per capita can decrease. The persis- agreed is certain, is increased warming. In regions tence of environmental degradation and natural re- that may also experience decreased precipitation, source depletion, therefore, is an environmental as warming will increase the likelihood of wild-land well as a social and economic concern. Figure 6.2 fires and agricultural drought, which feed back into highlights countries that are challenged to address climate change. environmental degradation. 92 Part I - Chapter 6 Loss of natural capital owing to environmental estimated to be more than 10 times that of pro- degradation and other factors is particularly criti- duced capital.iv Between 1990 and 2008, Nigeria’s cal in countries whose natural resources provide a population increased by 74 percent while its natu- higher contribution to the overall wealth than their ral capital decreased by about 1 percent. As a re- produced capital (UNU-IHDP and UNEP, 2012).

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