brief INSIGHT
The decline of biodiversity and the degradation of natural environments pose a substantial risk to the broader economy and financial stability, an issue that central banks and financial regulators cannot disregard.
To gain deeper insights into the potential impact of nature and ecosystem service degradation on financial stability, the ECB study investigated how much non-financial corporations and banks in the euro area depend on various ecosystem services. Moreover, the research also developed a method to assess the sensitivity of banks’ credit portfolios to potential changes in the availability of ecosystem services.
According to the report, 75% of corporate loan exposures in the euro area heavily rely on at least one ecosystem service. The study also emphasizes that continual degradation of nature, if it persists, could significantly affect loan portfolios, especially in specific regions and economic sectors, resulting in notable vulnerabilities.
The potential repercussions of the decline in ecosystem services could extend significantly throughout the economy, particularly due to the compounded effects arising from the intricate interplay of biodiversity loss and climate change. Acknowledging nature degradation and the associated decline in biodiversity as a plausible origin of economic and financial risks represents merely an initial phase in crafting a strategy to uphold both financial and price stability. In order for financial markets to more effectively account for the risks arising from nature loss and mitigate their influence, it’s crucial to address deficiencies in disclosure and quantitative risk modeling frameworks.
Explore the full report
Living in a world of disappearing nature: physical risk and the implications for financial stability
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