Finance and Earth system tipping points – Towards a transdisciplinary framework and research agenda

The Earth and financial systems are deeply intertwined, each impacting and being exposed to the other, implying potential regime shifts and contagions. However, the interactions between financial/biophysical mechanisms and tipping elements of both systems are insufficiently understood and underrepresented in current conceptual, theoretical, and empirical models, resulting in critical knowledge gaps.

Financial flows, by enabling environmentally harmful economic activities, can drive ecosystem degradation. Conversely, major environmental changes like global warming and biodiversity loss generate financial risks. Crossing Earth System Tipping Points (ESTPs) could generate escalating costs and losses through complex interconnections and nonlinear dynamics, potentially causing irreversible disruptions to financial systems. Similarly, surpassing certain financing thresholds tied to e.g., deforestation or resource extraction could trigger ESTPs.

Current knowledge is not sufficient to draw definitive conclusions on this conundrum, primarily due to limited integration of financial dynamics into ESTPs frameworks, which often overlook economic drivers and policy contexts. Such interactions are however evident in ecosystems like the Amazon Rainforest, where financial flows connect to land-use change, biodiversity loss, and GHG emissions. Reciprocally, financial models essentially ignore ESTPs’ dynamics and temporality, focusing instead on smoother/lower-uncertainty central scenarios.

A comprehensive understanding of the complex, interrelated mechanisms at play is essential for effective governance of ESTPs, both for prevention and impact management.

This research hence investigates how tipping dynamics in one system can trigger, amplify, or dampen tipping in another. For this, we undertake a comprehensive mapping of Finance and Earth systems tipping mechanisms through a literature review bringing together these fields across disciplinary approaches, such as biophysical tipping points, Earth system dynamics, human-natural systems interactions, micro/macroeconomic dynamics, ecological macroeconomics, financial system dynamics, behavioural finance, financial innovation, financial regulation. The second axis of the research consists in the development of a transdisciplinary framework connecting Finance and ESTPs. The elaboration of such a framework aims to bring together a synthesis of the various definitions, concepts, theories, observations, dynamics and mechanics, governing rules and laws, and mathematical formalisations that have been used so far in one or several of the sub-fields touching upon the broad topic. This attempt to propose a unified framework, approaching tipping phenomena [or described in other terms such as: network contagion and markets interconnectedness, liquidity spirals and market freezes, cascading failures, herding behaviour and market sentiment shifts, systemic risk mitigation and macroprudential policy, financial instability hypothesis] from both biophysical and socioeconomic perspectives together, aspires to offer a useful toolbox to better understand, and ultimately manage, these interdependent systems. Our preliminary findings serve as a foundation for a collaborative research agenda on which further work can be elaborated, spanning e.g., empirical and theoretical modelling, policy development, investment strategies.