Lying without lying: a parody of “research” on the financial risk of nature loss

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Tourism is a distinct and growing threat to global financial stability.  Banks are not taking the threat seriously and must begin to actively manage the myriad risks posed by tourism or they could face substantial future losses.  The threat is created both by outbound and inbound tourism and also by the internal movement of people for purely whimsical reasons that serve no practical purpose.  

The scenarios we developed indicate that GDP loss due to tourism could, in future, amount to 14% of GDP and that potential bank exposures amount to as much as 7% of available tier one capital.

The COVID-19 pandemic, which caused a decline of 3.4% global GDP in 2020, would have been limited to a small area in Central China if not for the pervasiveness of global tourism.  

The shock was far greater in countries like the UK which experienced a 19.4% GDP decline in Q2 2020.  The first reported coronavirus case in the country was a Chinese national who had arrived as a tourist from Wuhan.  Early in the crisis, the virus was spread by British tourists returning from holidays in Italy, suggesting that outbound travel is potentially just as risky for banks as the inward flow of foreign tourists.  Unnecessary domestic travel (aka tourism) also facilitated the transmission of the deadly virus.

Clearly the economic threat due to tourism is extreme and spiraling out of control.

Other problems include:

• The disruption to agriculture from the introduction of plant and animal pathogens that slip through the quarantine net.
• The high emissions created by airline travel, which further exacerbates climate change, creating a cascading risk profile and substantial nonlinearities that can be directly attributed to tourism.
• The need for local restaurants and hotels to adapt their businesses to cater for changing tastes and the accommodation of people of different cultures, creating the risk of business failure in a key segment of the retail economy.
• Rising crime rates and transport-related accidents from the unnecessary movement of people, both domestically and internationally.  This leads to social tension, escalating health care costs, and significant ramifications for the economy and the financial system.

We understand that there may be some positive aspects of tourism, but remember that this is a stress test.  Our focus is therefore limited to the risks associated with tourism and not to any opportunities that the practice may bestow.  We choose to either downplay or completely ignore any positive elements that stem from this insidious problem. 

Our scenarios are based on a static banking portfolio, meaning that we will not consider any adaptations made by banks or the business sector in dealing with the chronic underlying problems created by tourism.  The narrative of our stress scenario is that a group of tourists introduce a new avian flu species into the UK for which there is no vaccine.  The virus can be transmitted to bovines which leads to the decimation of the local dairy industry.  This causes second round effects on farm income.

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The “research paper” I presented is clearly farcical.  I don’t really think that tourism is a specific threat to banks that should be managed in any special way.  The benefits of tourism are, on net, clearly positive for banks, businesses, and everyone who is lucky enough to have the time and money to allow them to travel for pleasure.  

That said, nothing I said in my “analysis” was a lie.  The flow of tourists does pose some risk to the economy and the pandemic was exacerbated by the movement of people around the globe for frivolous reasons.  

Focusing on the negatives while completely ignoring the positives was clearly dishonest of me, though specific lies were absent.  Even if my research was scientifically rigorous, accurately capturing all the negative aspects of tourism and correctly applying them to the calculation of economic loss, it would still be largely irrelevant to policymakers simply because of its one-sidedness.

I confess that I didn’t crunch any numbers to arrive at my 14% GDP decline estimate, but would it have made any difference if I had?  The forecast may be quite reasonable given the (realistic but unlikely) scenario described.  There’s no way for you to falsify my statement or to suggest that your prediction of the effect may be somehow superior.   

I was inspired to write my little farce when I saw this report on the financial risks of nature loss published by the Green Finance Institute (GFI) in April.   The methodology they employ is quite similar to mine, though the circumstances they consider are different.  Tourism, despite the manifest downside risks, is unquestionably a net positive for the economy.  Businesses exist solely to facilitate and enhance the movement and enjoyment of tourists.  Despite the financial dangers, tourism is the lifeblood of many economies around the world.

Businesses don’t exist for the purpose of destroying nature.  Rather, it is a consequence or by-product of activities from which economic benefits are derived.  If a forest is cleared and a mammalian species is lost to create a coffee plantation, you still receive the benefit of enjoying a nice macchiato that costs 10c less than it otherwise would have.  I’m being facetious, but the point remains that the activities that lead to the loss of nature bring economic benefits that are completely ignored in the GFI’s report.  

What would the economic scales indicate if these benefits were included?  It’s difficult to say – there’s certainly not been enough research on the matter.  Nonetheless, just as one-sidedness invalidated my “research” on tourism, the same argument applies to the GFI report.  

I’m not saying that nature loss is a positive thing, but I am saying that it is unrealistic and dishonest to pretend that the economy does not benefit from the exploitation of natural resources.

The GFI claims that bank financial performance is also threatened.  I don’t want to miscontextualize so I’ll include the entire bullet point (the emphasis is mine):

“Looking across the portfolios of the seven largest UK banks, the analysis indicates possible near-term adjustments in the values of domestic holdings of up to 4-5% for particular sectors and banks from nature-related risks alone (no climate change). The study conducts the first (independent) aggregate financial ‘stress test’ of banks for nature based on publicly available data. Different banks show very different risks in terms of their scale and characteristics depending on the structures of their portfolios.  Depending on the bank, the most at-risk sectors include agriculture, utilities, real-estate and manufacturing. The 4 – 5% is conservative. These risks will compound with climate change and increase over time. The broad and correlated nature of these risks indicate that in the longer-term, nature-related risks could may (sic) be a threat to financial resilience.”

So the GFI’s one-sided analysis suggests not only a 4-5% loss in the value of all bank assets, but that this estimate is conservative.  So what would a more balanced prediction be?

The oldest existing bank was founded in 1472 and 30% of plant and animal species have been threatened or have ceased to exist since that time.  Banks and nature loss have co-existed for more than 500 years, yet the GFI chose not to – or could not –  empirically demonstrate the effect of nature loss on historical bank asset value.  If a 4-5% loss is conservative over the next 20 years, surely it’s possible to find something in the data from the past 500?

My best guess is that it would be close to a wash – zero correlation – or that banks come out slightly ahead relative to the unseen counterfactual.  As I said, more research would be beneficial.  The null hypothesis – that no effect is present – should normally be maintained until it can be rejected.

So what would an honest report of this ilk look like?  How can organizations like the GFI trigger action by banks on critical issues like nature loss?  Consider the following:  

Let’s be frank, banks can profit in good times and bad, in war and famine, in economic expansion and recession.  Nature loss is most likely an irrelevance for bank financial performance or financial stability.  Large and small corporations, if anything, likely profit slightly from the economic arrangements that lead to the destruction of species and of nature.

But look beyond your own narrow interests.  

Nature and species loss is a tragedy for humanity.  Your lending practices do not cause the loss but they do facilitate and accelerate it.  For the sake of all living things – every sentient thing that may exist in the universe – we implore you to change your ways.  

This is not for your own benefit or to mitigate your own financial risk: we don’t want to trivialize the most important challenge of our age.  It is instead for the benefit of humanity and all life on earth.

While the banks are digesting that directive, there is still a place for organizations like the GFI to conduct useful, honest research on the financial effects of climate change, including more specific problems like nature loss.  

I would welcome any solid empirical research, even if it was focused exclusively on the costs of climate change/nature loss, as long as the report was honest in describing its limitations.  In addition to research on the causes – and I’m certain there are scores of researchers already hard at work on these questions – I’d also welcome research by economists on the incentives and benefits that lead us to engage in activities that cause species loss.  

I would avoid making untestable scenario-based predictions.  I would avoid one-sided or incomplete predictions of future economic outcomes.

These methods are just dishonest,  and I think honesty is the best policy.