Where climate meets nature: a delicate balance

In the first part of our nature series, we explored how the loss of nature can significantly undermine long-term economic growth and societal well-being. In this second instalment, we turn our focus to the deep and dynamic relationship between nature and climate, and why protecting nature is not just of environmental importance but economically too.

Climate change and nature loss are not isolated crises – they are deeply interconnected.

Rising global temperatures, shifting weather patterns, and extreme events like floods and droughts are accelerating the degradation of ecosystems around the world. This degradation threatens industries that rely on nature, such as agriculture, forestry, fisheries, and tourism, putting trillions of dollars in global GDP at risk. As ecosystems deteriorate and biodiversity declines, nature’s ability to regulate the climate weakens, creating a dangerous feedback loop.

By investing in nature, we believe we can actively combat climate change. Forests, wetlands, oceans, and other ecosystems absorb and store carbon, regulate water cycles, and act as a buffer to communities against climate impacts. Healthy ecosystems are powerful tools in the fight against climate change.

In this blog, we will explore the interconnectedness of nature and climate and how aligning climate action with nature conservation can deliver a triple win for the planet, for people, and for the economy.

The problem

Our environment and climate are both facing significant threats. In the coming decade, the top four global risks are expected to be environmental, with extreme weather events driven by climate change, biodiversity loss and ecosystem collapse ranking highest [2]. This is a stark reminder that we need to act now.

The consequences

As explored in our previous nature blog the consequences of environmental damage are not just ecological, these are also financial and social. Environmental damage is more frequently being tied back to climate, with extreme weather events such as hurricanes and floods increasing with climate change. These events cause widespread damage to infrastructure, natural habitats and industries which rely heavily on nature, thus impacting ecosystems and society but also the economy. Protecting nature and acknowledging and understanding the interconnectedness of the two is essential not just for the planet, but for our economy as well.

Interconnected issues

It is crucial to recognise that nature and climate are deeply interconnected. The connection can often create complex feedback loops, as shown in the example below, that can be challenging to untangle.

• Nature → Climate: Cutting down forests reduces carbon absorption, increasing atmospheric CO₂.
• Climate → Nature: Rising temperatures and droughts increase wildfires, further degrading forests.

How climate change impacts nature

Climate change is already disrupting nature. While some species benefit from warmer conditions, the negative impacts – such as habitat loss and shifting weather patterns – are far more severe and widespread. Negative disruptions make it harder for ecosystems to remain balanced, which in turn affects the economic value derived from nature-dependent industries.

This is why, since 2022, our Net Zero Stewardship Programme, ensured biodiversity is part of how we assess climate-related risks and opportunities. Some examples of the negative impacts of climate change on nature are:

Biodiversity loss

Species unable to adapt or migrate face extinction, threatening industries like agriculture, forestry, and pharmaceuticals that depend on biodiversity.

Extreme weather

• Droughts reduce water availability, increasing the risk of crop failure and food insecurity.
• Wildfires are more frequent and intense, destroying habitats and releasing carbon dioxide. Warmer conditions also boost pest population, further stressing ecosystems.

Marine impacts

• Melting glaciers and rising sea levels threaten coastal habitats, infrastructure and tourism, with adaptation costs already rising.
• Coral bleaching from warmer oceans endangers marine life. Coral reefs provide nearly US$30bn annually in global benefits through tourism, fisheries and coastal protection [3].

Hidden threats

Climate change spreads invasive species and diseases, placing added pressure on native ecosystems. Melting permafrost releases methane, a potent greenhouse gas that accelerates global warming.

How nature impacts climate change

Nature is a powerful ally in the fight against climate change. We believe that protecting it is essential to slowing global warming.

• Forests, wetlands and other ecosystems absorb and store vast amounts of carbon dioxide, helping to regulate the Earth’s temperature.
• Healthy ecosystems support biodiversity, manage water cycles and enrich soil, which are key elements of climate resilience.
• Plants, animals and microorganisms work in harmony to maintain this delicate balance.

However, when nature is damaged the consequences are severe. Degraded ecosystems release stored carbon back into the atmosphere, accelerating climate change and weakening our natural defences.

The feedback loop

We can start to see from the above examples that the interactions between nature and climate can often form feedback loops that can be either regenerative or destructive. In the diagram below for example, deforestation reduces the number of trees absorbing carbon dioxide and accelerates the impact of climate change, while climate change increases wildfires, further degrading forests.

Climate change can wipe out species, making ecosystems weaker and less able to manage things such as water flow and carbon storage. When habitats are lost, it can disrupt the water cycle, exacerbating the effects of climate change by causing more droughts and floods.

Example of a feedback loop for deforestation

Navigating complexities

When working with our investee companies, we encourage the responsible integration of solutions that address both nature and climate. While there are many solutions that benefit both, some involve trade-offs. Royal London Asset Management aims to find balanced solutions that support both climate goals and the protection of nature.

Navigating trade-offs

Trade-offs refer to a situation where actions that benefit one goal might come at a cost to another. For example, solar panels reduce emissions but can disrupt ecosystems if installed in sensitive habitats. Hydroelectric dams generate clean energy but may block fish migration, alter water temperatures, and impact aquatic biodiversity. Nature restoration efforts, such as reintroducing species, can help ecosystems recover but may increase methane emissions from animals like beavers and large herbivores.

Royal London Asset Management aims to take a holistic approach to ensure that no single goal is pursued at the expense of another. We aim to find balanced solutions that support both climate and nature.

How we are acting on this topic

At Royal London Asset Management, we understand the importance of the connection between climate and nature and we:

• Are actively engaging with companies to ensure they do too
• Encourage integrated solutions that address both climate and nature
• Have developed a comprehensive Net Zero Stewardship programme that incorporates engagement and monitoring of not only climate, but social and nature issues.

We use our proprietary Climate Transition Assessment, which includes 12 indicators, to assess companies’ net-zero plans and their implementation. Our stewardship efforts support business transformations aligned with the Paris Agreement and a net-zero future, while also building resilience to physical climate risks.

Through this engagement, we will talk to companies to understand whether they are aware of any nature – climate trade-offs in their products or operations and whether they are prioritising the climate solutions which also have the highest benefits to nature.

We believe that protecting and restoring nature is essential – not just for the health of the planet, but for the stability of our economies and the well-being of future generations. By integrating nature into climate strategies, supporting nature-positive investments, and engaging with companies on these issues, we can help break destructive feedback loops and create a more sustainable and resilient future.

Our voting, engagement, research, and advocacy activities are designed to be pragmatic, informed by evolving market insights and local best practices, and always aligned with the long-term interests of our clients. These activities aim to enhance the value and integrity of our investment decisions.

Please note that voting and engagement practices may not apply uniformly across all Royal London Asset Management funds or strategies, as each has distinct investment objectives. For details specific to your investment, please refer to the relevant fund prospectus.

[1] Global annual finance flows of $7 trillion fueling climate, biodiversity, and land degradation crises, Dec 2023

[2] Climate change and nature loss pose greatest risks for humanity: WEF Global Risk Report 2024 | WWF

[3] The Economics of Worldwide Coral Reef Degradation

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The views expressed are those of the Royal London Asset Management at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.