Nature-related risk: a critical challenge for businesses

Financial institutions must anticipate and incorporate both climate-related and nature-related risks into their business activities and investment portfolios. The degradation of biodiversity and ecosystems presents substantial threats to financial stability, including physical, transition, and systemic risks. Recent estimates suggest that annual cost of losing ecosystem services range from USD 4 trillion to USD 20 trillion (OECD). 

Physical risks result from the degradation of nature, which impacts economic activities - ranging from acute crises like natural disasters to chronic issues such as ecosystem decline. Sectors dependent on specific ecosystems are particularly vulnerable. For instance, the decline of pollinators can reduce agricultural yields, while large-scale pollution events, such as oil spills, can disrupt business operations.

Transition risks include reputational and regulatory challenges as governments enforce stricter environmental regulations or as consumers become more environmentally conscious. Companies that fail to adapt to these demands risk being left behind as sustainable alternatives gain traction.

Systemic risks refer to the broader implications of biodiversity loss on the global economy’s resilience. Ongoing ecosystem degradation can undermine natural infrastructures, such as coastal wetlands that protect against storms, posing risks to both communities and businesses.

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