Understanding Nature-Related Financial Risks: Physical, Transition, and Systemic Implications

The Network for Greening the Financial System has highlighted the significant risks that nature-related factors pose to the global financial system. These risks can arise from the degradation of natural capital, loss of ecosystem services, and the misalignment of economic actors with actions aimed at protecting nature.

Nature-related physical risks, such as natural disasters and pollution, can lead to financial losses for industries dependent on natural resources. For example, the deterioration of coral reefs could result in billions of dollars in losses for the tourism industry in states like Hawaii and Florida. This could also impact US banks operating in those regions, leading to higher loan losses and asset devaluations.

Transition risks, on the other hand, stem from regulatory changes, evolving customer preferences, and technological advancements that may impact industries reliant on natural resources. These risks can manifest in the form of stranded assets, changes in demand and supply, and increased compliance costs.

Moreover, nature-related systemic risks can result from the partial collapse of ecosystems, leading to chain reactions that disrupt financial markets and stability. Central bankers have identified biodiversity loss as a significant threat to financial stability, emphasizing the need to address nature-related risks.

Overall, nature-related risks could increase operational costs and lead to losses in loan and investment portfolios for banks. Industries like agriculture, energy, tourism, and construction are particularly vulnerable to these risks, with a significant portion of bank loans exposed to nature-related factors. It is crucial for financial institutions to assess and mitigate these risks to ensure long-term financial stability.