Introduction

Healthy nature is essential for sustaining well-being and provides a multitude of benefits through ecosystem services. More than half of global gross domestic product (GDP)—approximately €40 trillion—depends on nature. However, natural ecosystems are currently experiencing an unprecedented decline driven by human activities, climate change, and habitat loss. From 1997 to 2011, it is estimated that the world lost between €3.5 trillion and €18.5 trillion per year in ecosystem services. This nature loss poses an existential threat to the economy and the financial system, as production processes rely on services like pollination, water purification, and flood protection.

Project overview

The primary objective of this study is to raise awareness of nature-related risks by assessing the relationship between nature, the euro area economy, and banks. The analysis focuses on physical risks, specifically the dependency of non-financial corporations (NFCs) on ecosystem services. It utilizes a granular dataset from AnaCredit for December 2021, covering approximately 4.2 million individual NFCs and over €4.3 trillion in corporate loans issued by more than 2,500 unique consolidated banks headquartered in the euro area. The study maps economic activities to ecosystem services and assesses their potential impact on credit portfolios.

Exposure assessment

Using the ENCORE dataset and EXIOBASE input-output tables, the research assesses both direct and indirect supply chain dependencies. Results show that approximately 72% of euro area NFCs—corresponding to around 3 million individual firms—are highly dependent on at least one ecosystem service. Degradation of these services would translate into critical economic problems for these entities. Furthermore, almost 75% of corporate bank loans in the euro area (nearly €3.24 trillion) are granted to NFCs with a high dependency on at least one ecosystem service. The most relevant services for economic production across the region include surface and ground water provision, mass stabilisation, and erosion control.

Sensitivity analysis

The study introduces a methodology to capture credit portfolio sensitivity to future changes in ecosystem service provision, utilizing the GLOBIO model and mean species abundance (MSA) metric. It evaluates three scenarios for 2050: a sustainability (Paris-aligned) scenario, a regional rivalry scenario, and a fossil-fuelled development scenario. Findings indicate that euro area banks are highly vulnerable; if the world continues its current emission pathway and exerts significant pressure on biodiversity, expected losses for banks could be on average 2.54 to 2.73 times higher than under a sustainability-aligned scenario. Countries including Germany, Lithuania, Ireland, and Belgium are identified as having the greatest potential losses.

Limitations of our study and future research needs

Several limitations exist, including the exclusive focus on corporate loans rather than bonds or equity. The analysis represents a static view of dependency and does not account for the ability of NFCs to change suppliers or adopt mitigation technologies. Current datasets also lack location-specific information for dependency materiality ratings. Furthermore, the model does not yet capture macro-financial feedback loops or intra-financial contagion that could amplify nature-related shocks. Addressing these data gaps and improving the understanding of the nature-climate nexus are priorities for future research.

Policy implications

Nature degradation and biodiversity loss are potential sources of economic and financial risk that central banks and supervisors cannot ignore. To limit the impact of these risks, gaps in disclosure and quantitative risk modelling must be filled. Global frameworks, such as the Taskforce on Nature-related Financial Disclosures (TNFD) and the EU Corporate Sustainability Reporting Directive (CSRD), which enters into force on 1 January 2024, are essential for strengthening information architecture. The European Central Bank (ECB) already expects banks to evaluate all environmental risk-related information beyond climate risks to ensure all-encompassing risk management.

Conclusions

The research concludes that the euro area economy is highly dependent on ecosystem services and that these risks can spread through the financial system, potentially triggering instability. An integrated approach to climate and nature is critical because they are inextricably intertwined. While measuring nature-related risks is less advanced than climate research, there is sufficient data and knowledge to enable timely and nature-friendly decision-making. Future work will address transition risks and the contribution of the financial sector to the drivers of biodiversity loss.