The economics of climate risk ignores the value of natural habitats

When Hurricane Delta hit Mexico’s Caribbean coast in 2020, insurance payouts were released within days – not to rebuild hotels or roads, but to repair coral reefs.

In the Mexican state of Quintana Roo, reefs are insured^[1] and restoration is taken care of by a local trust. After storms, payouts fund rapid restoration so reefs can keep doing their job: breaking up waves so they don’t erode the shore, reducing flooding, protecting tourism jobs and lowering insurance losses.

Nature is treated as part of the economic infrastructure. This idea is spreading, as it directly affects costs, risks and financial stability.

Until recently, sustainable or “green” finance has focused almost entirely on carbon emissions, net zero targets and climate-related investments. But these climate-only measures miss something basic. The economy doesn’t just depend on temperature; it depends on living systems.

In my field of sustainable finance and financial stability, research shows^[2] that when ecosystems fail, the costs show up in rising food prices, insurance bills and public finances. The health of the planet affects everyday costs.

Read more: The UK’s food system is built on keeping prices low – but this year's droughts show up its failings^[3]

Take food. Around three-quarters of our leading food crops^[4] benefit at least partly from animal pollination, including by bees. When pollinator numbers fall, harvests shrink. That pushes up food prices, drives inflation and squeezes household budgets.

Or consider flooding. Wetlands, forests and mangroves absorb water and slow storms. When they’re destroyed, floods cause more damage. Insurers pay out more, premiums rise or cover disappears. Governments often step in, using public money to deal with the fallout.

These aren’t niche environmental problems, they are economic shocks. In many parts of finance, climate risk^[5] is now being modelled. But nature loss is only starting to be treated in the same way.

In finance, the term “greenium” refers to the lower borrowing costs enjoyed by companies or governments seen as safer environmental bets. When the idea first emerged in the late 2010s, it was almost entirely about carbon emissions. But that’s starting to change.

Investors are beginning to recognise that destroying forests, reefs or soils increases future losses. Where risk rises, returns have to rise too. Where ecosystems are protected, financing becomes cheaper.

Read more: Your essential guide to climate finance^[6]

Change is already happening in three key areas: government debt, insurance schemes and regulation.

In 2021, for example, Belize refinanced part of its national debt in a deal linked to ocean protection. In return for protecting marine habitats, the country received debt relief. For investors, this wasn’t charity: healthy oceans support tourism, fisheries and long-term growth – all of which matter for a country’s ability to repay its debts.

The reef insurance scheme in Mexico isn’t alone any more. Similar ideas are being explored for mangroves and wetlands^[7], especially in storm-prone regions such as the Caribbean and parts of southeast Asia. These ecosystems reduce damage before disasters happen. For insurers, that means fewer claims. For households and businesses, it can mean lower premiums and better access to cover.