The threat of multi-system resilience failure is rising, in nations around the world. The United States is living through a convergence of emergencies, which should serve as an alarm call to nations and institutions around the world. Wildfires, droughts, storms, floods, fresh water depletion, and the loss of habitat and biodiversity, are all creating increased risk to society—through the food system and by straining the ability of institutions to respond.
The 2020 North American wildfire season is far worse than any on record, and months from being over, and the US is not alone. Fires are burning from the Amazon to the Arctic. In Siberia, “zombie fires”, which simmered throughout the winter and re-emerged in summer, are putting the viability of regional ecosystems at risk. There is mounting concern that worsening uncontrolled fires in the Amazon could turn the rainforest into a savannah.
The threat of multiple natural and human systems experiencing simultaneous major shock events is steadily rising. This isn’t alarmism about the future; this is happening now.
What does this mean for the financial world? It means thinking differently about measurable returns on investment (ROI).
- The idea that short-term ROI was achievable while climate destabilization and biodiversity collapse were long-term problems allowed the old mindset to prevail, wherein successfully pushing costs off the balance sheet was a kind of operational efficiency.
- Now that these crises are converging with the crippling costs of a deadly pandemic that is far from over, investments that exacerbate system-level cost have the effect of depleting value-creation across entire portfolios, or national budgets.
It is now possible to measure both the immediate and longer-term costs of letting these risks get worse. There is a measurable reduction in overall ROI (XROI) from carrying negative externalities, stranded asset risk, geophysical risk, or transition risk. Financial institutions have to carefully avoid these compounding areas of cost and risk.
With the converging crises of COVID-19, related economic losses, climate disruption, geophysical disaster risk, and biodiversity collapse, it is now evident that resilience is a baseline imperative. All financial interests should begin shifting to resilience-building finance without delay.
- As climate costs pile up, it is increasingly necessary to eliminate all future climate disrupting pollution from investment portfolios and national planning strategies.
- This means the immense growth potential of zero-emissions energy systems now also benefits from the directional guarantee; there is no other way investment can safely flow.
- The combination of climate disruption and biodiversity collapse means ecosystems are at risk, watersheds are being depleted, and food security will become increasingly elusive.
- Major harvest collapse and related food price spikes can destabilize nations and regions; multiple breadbasket failure could present an overwhelming challenge today’s institutions are not prepared to address—which would deepen and prolong that crisis.
- Recovery funds must flow to food-growing practices that build resilience in ecosystems and watersheds, naturally enhance the productivity of land, without threatening sensitive habitats and species, and reinforce human health.
Investments in the public and private sectors that do not rapidly chase these clear non-market signals, and rapidly innovate to build resilience, will result in major system-level losses. The Commodity Futures Trading Commission warns climate disruption alone could fundamentally destabilize the financial system.
Add to the geophysical and market risks facing specific institutions and sectors the risk of financial collapse, and the threat of resilience failure—where multiple systems fail, resources are not available to respond to crisis, and system-level degradations proliferate—can be shown to be critically intensifying.
That financial collapse—involving not only climate disruption, but also collapse of ecosystems and food and water supplies—could result simply from the fact that core calculations on which all value is assessed do not accurately count the cost of these proliferating interacting macro-critical risks.
There is no reason any investment should avoid the extra value of building resilience for systems the investor or other stakeholders depend on. With tens of trillions of dollars in lost GDP already straining public agency budgets at all scales, across the world, investment in food systems, energy systems, and other new infrastructure, should leverage the double and triple value creation potential of technologies and practices that reduce risk, eliminate cost, and build resilience across the entire economy.