Ecosystem tipping points: material risks for financial institutions

Ecosystem tipping points (ETPs) are critical thresholds that are reached when small changes trigger sudden, irreversible, and often devastating shifts in an ecosystem’s state. There are several ecosystems around the world that are at risk of reaching their tipping points because their stability is threatened by human activities. ETPs pose serious, material risks to the global economy and financial system. 

Understanding critical ecosystems 

Ecosystems provide vital services to humanity. They supply resource, regulate the climate, and strengthen resilience against natural disaster like floods, storms or coastal erosion. However, human activities — like land-use change, pollution, and overexploitation as well as climate change caused by human activities — are pushing many ecosystems toward their tipping points. 

An April 2024 report on ETPs, published by the University College London Institute for Innovation and Public Purpose, identifies several ecosystems most at risk of reaching their tipping points (see Figure 1). 

Figure 1. Five ecosystems at risk of collapse and that require attention from policymakers. Source: Marsden, L., Ryan-Collins, J., Abrams, J., and Lenton, T. (2024). Ecosystem tipping points: Understanding risks to the economy and financial system. UCL Institute for Innovation and Public Purpose, Policy Report 2024/03.

When an ecosystem crosses its tipping point, it can undergo rapid, large-scale changes, with significant effects on both the economy and stability of financial systems. 

Economic and financial risks 

According to the authors of the ETP report, the collapse of these ecosystems could result in severe economic losses, including reduced food and energy security, damage to infrastructure and real estate, health risks that undermine productivity, and global repercussions through disrupted value chains and intensified climate change. 

The authors go on to explain that for financial institutions, ETPs can cause higher default rates, declining asset values, market volatility, insurance losses, and inflation shocks. These risks are systemic because many economic activities are deeply interconnected with ecosystems. Current economic models often fail to fully capture these risks, leading to the severity of potential losses being underestimated. More accurate models should account for the irreplaceable nature of ecosystems, their direct and indirect effects through global value chains, and the potential for large-scale shocks. 

Key recommendations 

The ETP report calls for a precautionary approach focusing on preventing ecosystems from reaching their tipping points. Instead of trying to predict when tipping points might occur, we should act quickly to reduce harmful impacts. Financial institutions should apply a double-materiality perspective — both to avoid economic activities that drive ecosystems toward tipping points and to proactively manage their own exposures to risks associated with ecosystem collapse.  

The industry sectors most responsible for driving ecosystems toward their tipping points are agriculture, forestry, fisheries and aquaculture, oil and gas, mining, and hydropower, as well as carbon-intensive sectors such as energy, materials, utilities, and industrials. (If you are interested in more information on the sectoral activities driving physical risks and the expected economic impacts if ETPs are reached, see Table 1 on page 18 of the report.) 

Because ETP risks are systemic, individual financial institutions cannot effectively manage them alone. Policymakers, central banks, and financial supervisors are urged to take a broad approach across the financial system. 

Financial institutions’ policies today 

Of the 21 international financial institutions assessed in ECOFACT’s Monitoring Peer Policies, 19 currently assess biodiversity risks as part of their client due diligence procedures. However, only 8 of these 19 institutions explicitly mention specific ecosystems in their policies, either mentioning a geographic indicator (six financial institutions explicitly reference the Amazon) or protection status (such as UNESCO World Heritage Sites, Ramsar Wetlands, or IUCN Category I to IV areas). Aside from the Amazon region, the other ecosystems at risk of reaching ETPs are largely absent from the public-facing environmental and social policies of financial institutions. 

Curious about our analysis? 

At ECOFACT, we closely monitor ESG developments and the environmental and social risk policies of leading financial institutions. We can help you understand and align with evolving stakeholder expectations. If you need help to adjust your company’s approach to climate change, biodiversity, or human rights, or your engagement with coal, oil and gas, agriculture, chemicals, or other topics, ask to speak with one of our analysts. 

References 

Marsden, L., Ryan-Collins, J., Abrams, J., and Lenton, T. (2024). Ecosystem tipping points: Understanding risks to the economy and financial system. UCL Institute for Innovation and Public Purpose, Policy Report 2024/03. 

Photo credits 

(Mangroves) Florida-Guidebook.com on Unsplash; (Amazon) Photo by Renting C on Unsplash; (Peatlands) Photo by Kim Worm Sorensen; (Boreal) Photo by Luca Bravo on Unsplash; (Coral) Getty Images in collaboration with Unsplash+.