Introduction

Nature-related financial risk assessment is currently in its infancy, yet its importance for financial stability and nature recovery is increasingly recognised. More than half of global gross domestic product (GDP), approximately $44 trillion, is dependent on nature and its services. Despite this, critical services such as clean air, water, and fertile soils are being undermined by human activities. The 2019 IPBES Global Assessment Report concluded that 14 of the 18 critical ecosystem services assessed had declined since the 1970s. These risks are currently not priced into financial markets or accounted for in standard prudential risk management scenarios, leaving the global financial system exposed to potential systemic risks.

Characterising nature-related risks and the implications for analytics and scenarios

The erosion of natural capital is driven by land-use change, direct exploitation of organisms, pollution, and climate change. Statistics indicate that 50% of natural ecosystems have declined, and 85% of wetland area has been lost. Currently, six of the nine planetary boundaries essential to sustaining livelihoods have been breached. The economic implications are significant: land degradation has already reduced productivity in 23% of the global terrestrial area. Furthermore, pollinator loss puts between $235 billion and $577 billion in annual global crop output at risk. The report highlights that nature-climate systems are complex and non-linear, meaning that ignoring cascading and compounding risks can lead to a severe underestimation of potential losses.

A preliminary set of physical nature-climate scenarios

The document proposes several principles for developing nature-related scenarios, including the need to capture wide risk transmission channels and represent the strong localisation of nature-climate risks. It introduces the Integrating Nature Climate Scenarios and Analytics for Financial Decision-making (INCAF) framework, which maps scenario space across two axes: climate action and biodiversity action. This creates four distinct “worlds”: the Nature Positive World, Too Little, Too Late, Biodiversity Depletion, and the Hot House World. Additionally, the report identifies over sixty historical analogues, such as the UK’s 2001 foot and mouth disease outbreak (costing £4-5 billion) and the Aral Sea crisis, to inform a typology of almost eighty potential nature-related physical risk shocks.

Preliminary risk screening and assessment approach to identify key material risks to a country

The report develops a new risk screening approach that moves from dependency assessment to risk quantification using the formula: Risk = Hazard x Exposure x Vulnerability. This methodology introduces nature-related Value at Risk (nVaR) to estimate potential losses across different sectors. Preliminary analyses demonstrate that water-related risks are dominant, potentially constituting 7–9% of global GDP under a 5% Value at Risk (VaR) scenario. Agriculture is particularly vulnerable, with 14–18% of output at risk from water-related issues and 12% at risk from pollinator decline. Geographically, China and the USA face the highest absolute financial risks due to their economic size. China’s manufacturing sector faces an estimated €2.0–2.7 trillion in water-related nVaR, while its air and water pollution risks are estimated at €820 billion and €850 billion respectively.

Example application: step-wise approach to utilising the scenario tool within financial risk assessment

The report provides a practical demonstration of its scenario building blocks by applying them to a hypothetical severe drought in France. This stepwise approach identifies critical dimensions of risk, such as water supply shocks to industry, agricultural supply shocks exacerbated by soil erosion, and human health impacts stemming from urban pollution. The analysis generates initial shock values for ecosystem services related to water and air, providing an upper-bound estimate suitable for financial stress testing. This demonstration illustrates how central banks can prioritise specific narrative scenarios based on their country’s unique economic structure and ecological vulnerabilities.

Conclusions

The research concludes that nature-related risks are macro-critical for the global financial system and act as a risk multiplier for climate change. There is a clear rationale for precautionary action by central banks to identify systemic issues and address regulatory gaps. Recommendations include the co-development of global nature-climate related risk scenarios and the creation of baseline datasets to ensure consistency across jurisdictions. The NGFS is encouraged to provide technical assistance and capacity building to its members to support the integration of these complex nature-related risks into standard financial risk assessments and prudential oversight.