Ecosystem Services Have an Important Role in Risk Mitigation

Apr 13, 2021 | Blog, ESG Reporting

Ecosystem Services Have an Important Role in Risk Mitigation

Ecosystem services include all of the ways that the natural environment contributes to human livelihood and well-being. The Food and Agriculture Organization of the U.N. describes ecosystem services as “the multitude of benefits that nature provides to society” and points out that:

“Despite an estimated value of $125 trillion, these assets are not adequately accounted for in political and economic policy.”

Farmland, of course, has immense value. They provide crop growth and livestock and contribute to economic health. Economies, communities, businesses, even the world, all benefit from U.S. agriculture.


Without in any way ignoring this value, it is also important to recognize when natural ecosystems, areas, and habitats should stay natural.


A report in Nature Sustainability argues that, in a study, “the economic benefits of conserving or restoring natural sites ‘outweigh’ the profit potential of converting them for intensive human use.”

Increasingly, ecosystem services are being recognized for the prominent role they have to play in mitigating climate risk and fostering a more water-resilient economy.

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What Are Ecosystem Services?

The Millennium Ecosystem Assessment (MA), which brought the term into widespread use, describes four different types of ecosystem services:

  • Provisioning services are benefits that are extracted directly from nature, such as food, fuel, and drinking water
  • Regulating services include those that keep natural systems in check, such as carbon storage, air and water filtration, and flood and erosion defense
  • Supporting services are the basic functions of nature, such as photosynthesis and soil creation
  • Cultural services are those that impact society in a non-material way, such as the facilitation of recreation, music, and art

Ecosystem services are a major component of the water cycle, and they play a key role in regulating the climate. As a result, their impacts are felt on both a macro and a micro scale. For example, healthy ecosystems play a role in flood protection (through healthy soils that resist erosion), drinking water purification, and agricultural irrigation.



The Value of Ecosystem Services

Ecosystem services can be thought of as a kind of natural capital, and in some cases, researchers have assigned a number value to them to determine their financial value. This type of analysis shows that conservation can help to benefit local businesses and economies.

Under one model, the Toolkit for Ecosystem Service Site-based Assessment (TESSA), researchers found that:

“If Nepal’s Shivapuri-Nagarjun National Park … was converted from forest to farmland, it would cut carbon storage by 60% and reduce water quality by 88%, along with other costs, leaving an $11m a year deficit.”

Similarly, an EPA study in 2014 found that “the weighted average economic value for headwater catchments in the United States was $31 million per year per catchment.” This number included $470,000 as the “average yearly value of water supplied” and over $29 million for “improving water quality by reducing nutrient pollution.”

Ultimately, ecosystem services are at their most effective when the complete system is intact, making it important to consider the whole picture when making decisions about land use and water management.

Complete ecosystems foster healthier agriculture. Biodiversity and ecosystem integrity give benefits to agriculture. Isolating crops from the rest of the nature that they were meant to be in, they are at a disadvantage.

Practices like regenerative farming help to support ecosystem services by focusing on soil health, water quality, wildlife habitats, crop diversity, and other factors that contribute to a healthy and vibrant ecosystem.



How Ecosystem Services Can Reduce Climate Risk

When farmers, conservation groups, and other policy-makers create plans that are built around ecosystem services, these are known as Nature-based Solutions (NbS). These solutions can include practices such as native plant integration and habitat restoration. The Nature Conservancy describes it this way:


“Nature-based Solutions (NbS) seek to maximize the ability of nature to provide ecosystem services that help address a human challenge, such as climate change adaptation, disaster risk reduction or… food production.”


In other words, rather than addressing water scarcity or climate risk through expensive investments in man-made infrastructure, farmers and other ag professionals can enlist nature in the service of risk mitigation. Wetlands are well-suited to serving as natural flood protection, and can assist with nutrient cycling and runoff reduction, while forests can reduce the cost of drinking water by keeping headwaters flowing freely:

“When paired with traditional infrastructure, natural infrastructure — wetlands and forests — can reduce water management costs and deliver other cultural and economic benefits coveted by twenty-first-century communities, like recreational green spaces and fish and wildlife habitats.”

When ecosystems are damaged by poor management practices, the loss of ecosystem services can be felt throughout the agricultural economy. Farmers may encounter water shortages, reduced crop yields, and supply chain interruptions. Investors may be faced with stranded assets and other impacts that are material to their portfolios due to climate and water risk.

These concerns are already a reality in many farming regions. Agriculture professionals can help prevent situations from worsening with proactive approaches to risk mitigation.



Using Data to Understand Ecosystem Services

Understanding how their loans and investments benefit from ecosystem services will be crucial for ag lenders and other financial institutions striving to protect their bottom line. They form a major part of natural capital and can contribute to a portfolio’s overall climate risk.

However, without access to the right data, it can be hard to determine the impacts that ecosystem services have on a particular investment or farming operation.

Macro-level datasets – such as rainfall or drought risk data – are a great start but may not provide the level of granularity needed to obtain a full picture of the water security situation of a given parcel of land. Data and decision-support tools can give ag professionals a deeper insight into the ecosystem services that are material to their portfolios and that specific parcels rely on.

A big part of mitigating water risk and other climate risks is to identify the role that the ecosystem plays in protecting the water supply and regulating weather patterns. With this perspective, ag lenders and investors can ensure that the agricultural economy works along with the ecosystem, rather than at odds with it, to achieve a result that yields the most benefits.

To read about ESG reporting and capital risk in agriculture, visit the explorable AQUAOSO Guide.

The Bottom Line

Ecosystem services are the benefits that the natural world provides to society, ranging from water filtration to flood protection. Intact ecosystems play a role in the agricultural economy, especially when it comes to soil health and water availability – but are often overlooked.

By identifying the ecosystem services that a parcel of farmland or agricultural operation relies on, ag lenders and investors can make more informed decisions about water and climate risk – and potentially implement Nature-based Solutions to address them.

Contact AQUAOSO to schedule a demo of the Water Security Platform, or subscribe to the newsletter to get more insights about water security in your inbox.

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