Introduction

Natural ecosystems are fundamental to economic development and human survival. In the euro area, approximately 72% of non-financial corporations, representing around three million firms, are highly dependent on at least one ecosystem service. These firms account for nearly 75% of corporate bank lending. However, European Union and global ecosystems are under mounting pressure, with biodiversity loss accelerating across many regions. Water ecosystems are particularly distressed; just 38% of surface-water bodies achieve good ecological status, and water stress already affects about 30% of EU territory and 34% of its population each year. Degraded ecosystems undermine productivity, disrupt supply chains, and increase vulnerability to shocks, creating systemic risks for the economy and financial sector.

Nature value-at-risk

This study applies the nature value-at-risk (NVaR) framework to provide a structured methodology for quantifying potential economic output at risk from ecosystem degradation. NVaR measures the share of sectoral economic output at risk of loss under specific scenarios of ecosystem-service degradation by linking biophysical shocks with sectoral-production functions. The framework provides a spatially scalable and globally consistent tool for nature-related risk assessments. The analysis indicates that water-related ecosystem services dominate in terms of risk. Surface-water and groundwater scarcity, together with regionally declining water quality, constitute the most material nature-related threats to the euro area economy.

Macroeconomic and macrofinancial impacts

The results suggest that most significant risks originate from water-related services, with nearly 12% of economic output at risk due to degraded flood protection. Surface-water scarcity alone could expose up to 24% of euro area output to risk under a drought event with a 100-year return period. This finding demonstrates the importance of using granular nature and firm-level data, as country-scale inputs tended to underestimate the output at risk at just 9%. Importantly, around half of the total risk originates outside the euro area through international supply chains, highlighting the vulnerability of the euro area economy to overseas ecosystem degradation. Global harvest shocks currently account for around 30% of medium-term inflation volatility in the euro area.

Deep dive into water-scarcity and quality-related risks

Agriculture emerged as the most exposed sector, with potential output losses of up to 38% under a 100-year drought event. Other sectors, such as manufacturing, mining, and construction, showed high vulnerability, with more than 20% of their output at risk even under moderate conditions. Mapping these results to bank portfolios using the AnaCredit dataset revealed that around 19% of loans are exposed to surface-water scarcity and 22% to groundwater scarcity, while 12% are linked to risks from degraded water quality. The highest concentrations of loans at risk were observed in real estate activities, manufacturing, and wholesale and retail trade. Worsening water scarcity and declining water quality could become material drivers of credit risk, potentially amplifying systemic vulnerabilities.

Endogenous risk – bank level exposures and impacts

A complementary analysis examined endogenous risk, which captures how banks’ lending and investment decisions create biophysical pressures that feed back into future financial risks. The results showed material feedback loops, with water-related services being the dominant transmission channel. Endogenous risk was concentrated in the manufacturing sector and propagated through upstream supply chains. Approximately 8% of aggregate loan value was exposed to surface-water dependency risk in counterparties’ direct operations, an exposure further amplified by the activities financed by those portfolios. Financing firms that degrade critical ecosystem services increases banks’ own exposure to credit, market, and operational risks.

Limitations of the study and need for further research

The NVaR framework is highly sensitive to the granularity of input data and methodological choices. Current dependency indicators do not represent firm-specific water use or distinguish between groundwater and surface-water sources for all sectors. The analysis captured first-order direct and indirect risks but did not incorporate second-round effects on prices or capture how risks to one ecosystem might impact others. Future research should advance towards an integrated framework that captures the combined effects of multiple interdependent services and models second and third-order non-linear cascade effects. Improving nature-related data and firm-level disclosures remains a priority.

Policy relevance

Nature degradation is now explicitly integrated into the ECB’s monetary policy strategy assessment alongside climate change. Integrating nature degradation into monetary and financial analysis is critical to preserving price stability and maintaining financial stability. Robust assessment requires reliable firm-level disclosures, including consistent reporting of water abstraction volumes and effluent intensities. Policymakers should pursue efforts to ensure the availability of harmonised, standardised, and reliable sustainability information, including under the Corporate Sustainability Reporting Directive (CSRD). Banks are expected to manage material risks stemming from nature degradation just as they do other financial risks.

Conclusions and next steps

NVaR offers a scalable entry point for embedding nature-related risks into macrofinancial stability analysis. Water-related risks are the most material for the euro area economy and banks, demanding an integrated and coordinated policy response. Next steps include the development of a nature-related stress test for euro area banks and the further integration of nature-related risks into monetary policy frameworks. Strengthening interdisciplinary collaboration and advancing macrofinancial modelling will be essential to gauge how ecosystem degradation triggers shocks that affect inflation and the transmission of monetary policy.