UCL Institute for Innovation and Public Purpose (IIPP) Working Paper Series: IIPP WP 2024-11.
Authors:
- Lydia Marsden | Research Fellow in Sustainable Finance | UCL Institute for Innovation and Public Purpose
- Josh Ryan-Collins | Professor in Economics and Finance | UCL Institute for Innovation and Public Purpose
- Jesse Abrams | Senior Research Impact Fellow | Global Systems Institute, University of Exeter
- Timothy Lenton | Professor in Climate Change and Earth System Science | Global Systems Institute, University of Exeter
Abstract:
Large-scale ecosystem breakdown poses systemic macroeconomic and financial risks due to the loss of key ecosystem services, including carbon sequestration, upon which a great deal of economic activity relies. However, there has been little empirical work identifying the financial flows, as opposed to point-in-time measurements of financial exposure, that support activity associated with such ecosystem degradation. In this paper, we examine financial flows associated with two ecosystems – the Brazilian Amazon rainforest and tropical peatlands in Indonesia – where breaching ecosystem ‘tipping points’ could have systemic and irreversible impacts. We use supply chain data to identify 39 companies linked to significant land use change and degradation in these ecosystems and connect this to a newly constructed granular dataset of financial flows covering lending and capital markets (equity and debt issuances) activities over the past decade.
Flows to these companies were facilitated by a relatively concentrated group of commercial and investment banks, presenting a possible intervention point for influencing sustainability transitions. In the case of the Brazilian Amazon, flows were headquartered mainly in Global North financial hubs. For Indonesia, by contrast, most flows were domestically based or from the surrounding region.
To assess the potential impact of regulatory restrictions on these flows through changes to the cost or availability of financial capital, we undertook an initial exploration of the financial vulnerability of the larger companies in our sample and found significant heterogeneity. Whilst targeting financial flows could be impactful for some companies, such as those in the Brazilian beef sector, others have comparatively high retained earnings and low debt burdens, which may insulate them from finance-based measures to reduce their environmental impacts, including (macro)prudential regulations. This latter case, combined with the challenges of connecting a globalised financial system to on-the-ground impacts through networks of multinationals and their subsidiaries, suggests that (global) policy coordination across financial, fiscal and environmental policy spheres will be needed to decrease harmful economic pressures on ecosystems with tipping points.
Reference:
This working paper can be referenced as follows: Marsden, L., Ryan-Collins, J., Abrams, J., and Lenton, T. (2024). Financial interactions with ecosystem tipping points: evidence from the Brazilian Amazon and Indonesian peatlands. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2024-11). Available at: https://www.ucl.ac.uk/bartlett/public-purpose/publications/WP-2024-11.