Really Too Big To Fail: Parallels between the Global Ecological System and the Global Financial System
The biosphere is the global ecological system within which species and ecosystems interact with each other, and with other earth systems in many different and complex ways. It is the highly complex adaptive interplay between living organisms, the climate, and broader Earth system processes that has led to a resilient ecological system that our economies, societies, and livelihoods fundamentally depend on.
For generations, the global ecological system — which is around 3.5 billion years young -has co-evolved with other earth systems and experienced a relatively long degree of stability, particularly in the last 10,000 years. However, within a tiny slither of that timeframe the biosphere has changed dramatically. A swell of evidence has shown that the cumulative effect of our species has expanded to such an extent over the past 70 years or so that it has become a significant force affecting the very functioning of the biosphere.
While a significant amount of human and societal progress has been made over this period, increasing pressures of an ever growing global population and ever expanding global economy has sent tremors across the global ecological system. The planet’s wilderness has diminished, its land, seas and resources have been devoured, and species numbers have shrivelled as the beckon of a “Sixth Mass” Extinction has grown ever louder. The system’s resilience has been eroded as elements have, rather literally, collapsed or disappeared.
Such a system — while vastly more complex — is analogous to the global financial system. The latter is a large, complex network of financial institutions, whose activities are highly intertwined, and linkages that can lead to powerful transmission of financial shocks. The activities of natural institutions — or natural assets — are also deeply intertwined, as interplay among species and ecosystems provide critical services (ecosystem services). Disruptions to these natural assets such can lead to devastating shocks in bad times, as critical services either become poor, unreliable or non-existent. The degree of complementarity in ecosystem services, particularly regulating and maintenance services such as carbon sequestration or climate regulation, means that if one of them is disrupted, others will be disrupted as well.
Just as disruptions to the global financial system spill over to the real economy, so do disruptions to within the global ecological system. Ecosystem productivity and resilience are vital for economic activities, as every economic activity ultimately relies on some form, or combination of, ecosystem services. And a growing body of work that is quantifying the extent of economic effects from global ecological system disruptions. Recent work by the World Bank found material economic impacts occurred across regions and income groups under a scenario where key three ecosystems (tropical forests, wild pollinators and marine fisheries)and their services collapsed. Heterogeneity in estimated economic impacts were due, in part, to these countries relying relatively more on ecosystem services for real economic activities and the extent of the interconnectedness of the global economy and supply chains that propagated effects.
Unlike the global financial system, however, the nature of many elements (that is, natural assets, ecosystem services and other natural processes) that make up the global ecological system are invisible, mobile or silent. We cannot see the vast swells of oxygen plants generate, but cherish each breath photosynthesis allows. We cannot keep up with the migration patterns of many birds, but benefit from their abilities to act as pest controllers, pollinators and sources of other nutrition. We do not hear the work of the soils under our feet, but we would feel the fallout from their disruptions as food supplies would suffer. This means that the failure of any part of the ecological system may not be clear in real-time, with its effects only emerging painfully over time.
The Global Financial Crisis of 2007–08, on the other hand, was starkly clear in real-time, as collapses across financial asset classes could be seen on screens. The Crisis also showed the pivotal role that some institutions — known as Globally Systemically Important Financial Institutions (G-SIFIs) — can play in amplifying shocks. And evidence suggests that global ecological system also shares a similar feature. That is, certain elements of the global financial system are relatively more important, in that they provide services that are essential for the functioning of the system as a whole. For example, recent work suggested that almost 40% of land and 25% of ocean area may underpin 90% of ecosystem services.
Instability in one or several of these Globally Systemically Important Natural Assets (G-SINAs) — such as the Amazon, the Congo Basin, or the boreal forests of Canada and Russia — could transmit across ecosystems and borders, potentially setting off tipping points, regime shifts and vicious feedback loops. Research on thirty types of regime shift spanning physical, climate and ecological systems indicated that exceeding tipping points in one system can increase the risk of crossing them in others, and some links were found for 45% of possible interactions. Therefore, while location matters in terms of where the nature shock originates, such shocks can transmit across the system and have truly global implications.
Another key difference between our global financial system and global ecological system is the location of its systemic nodes. Unlike the former, which has a relatively higher concentration of G-SIFs in advanced economies, the most critical G-SINAs are located in emerging markets and developing countries. As localised instability in these natural assets can transcend countries’ boundaries, our collective need to understand their condition and connections are vital. Moreover, it underscores the need for accessible, timely and location-specific data, often in areas and regions where such data is lacking the most. This is something the Taskforce on Nature-related Financial Disclosures (TNFD) has underscored as vital to support effective nature-related financial risk management and mitigation.
In the aftermath of the Global Financial Crisis, there was a dogged focus and concerted effort by financial regulators to ensure that G-SIFs were sufficiently capitalised both to ensure that the likelihood that risks would originate from any single one were lower and their functioning for the broader benefit of the broader financial system and real economy. The financial role and importance G-SIFs meant they were seen as ‘too big to fail’. Actions were taken to ensure the survival of the system for the benefit of society.
The parallel for G-SINAs is clear: they also need to be greater capitalised. Specifically in terms of financial investments to support increased conservation and restoration efforts, to ensure potential instabilities are minimised and the provision of their key services are maximised. The global benefit of these GSINAs would demand the make-up of such capital needs to come from all sources across the financial spectrum. This is something underscored by many, ranging from the Paulson Institute and the Nature Conservancy to the UN Convention for Biological Diversity (CBD) post-2020 global biodiversity framework.
Today, we are now in a place where G-SIFs are better capitalised where they were and events has suggested the global financial system is now more resilient to shocks. However, the role and characteristics of G-SINAs and the global ecological system means we cannot afford for a version of 2007–08 before we act. The science on the degradation of these assets, and the ecological system more broadly is disturbingly clear. In addition, the deep uncertainty associated with how these natural assets, linkages and processes work, including non-linearity dynamics, tipping points and regime shifts, mean that the case for a precautionary approach to action is strong. When it comes to supporting the global ecological system through supporting and capitalising G-SINAs, we need to act sooner rather than later. They really are too big to fail.
This article was originally posted on LinkedIn on 13 May 2022.
