Financial Risk in a Degrading World: Nature Loss & Ecosystem Impacts

While climate change is by now widely recognized as a possible source of financial stress, supervisors and policymakers are increasingly looking into financial risks that stem from the broader environmental dimension. Indeed, ecosystem degradation and biodiversity loss have impacts on the real economy, as all economic sectors are directly or indirectly dependent on one or more ecosystem services – water provision being the most prominent example.

In turn, there can be impacts on banks, insurers and asset managers. In analogy with climate-related financial risks, also nature-related financial risks can be distinguished in physical and transition risks. This lecture will provide a general introduction to both classes of nature-related financial risks, showing that (large) banks already take these risks into account, and offering practical tools to assess the materiality of nature-related financial risks and for nature stress-testing.

The session will be of particular relevance to supervisors and regulated entities across the banking sector—including domestic retail significant institutions (SIs), less significant institutions (LSIs), and international banks operating in Ireland.