Executive summary

Biodiversity plays a critical role in human well-being and economic activity by providing essential ecosystem services like food provisioning, clean water, and flood protection. However, natural ecosystems have declined by nearly 50 per cent relative to their original state due to human activity. This loss creates significant risks for financial systems, spreading through credit, market, and operational channels. For instance, a 2019 study indicated that over 40 per cent of securities held by French financial institutions were highly or very highly dependent on ecosystem services. Recognising this, Target 15 of the Kunming-Montreal Global Biodiversity Framework (GBF) encourages governments to ensure that large companies and financial institutions regularly monitor, assess, and transparently disclose their biodiversity-related risks, impacts, and dependencies.

Overview of biodiversity-related financial risks

Global biodiversity loss is accelerating at an unprecedented rate, with species extinction levels estimated at tens to hundreds of times higher than the natural background rate. Approximately 25 per cent of remaining plant and animal species are currently threatened with extinction. Humans have significantly altered 75 per cent of terrestrial land cover, and 66 per cent of the ocean is subject to cumulative impacts. These changes compromise the provision of ecosystem services; the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) found that 14 out of 18 assessed service categories have declined since 1970.

Financial risks are categorised into physical and transition risks. Physical risks involve direct economic shocks, such as droughts affecting agriculture or the spread of diseases via invasive species. These can be acute or chronic. Transition risks arise as stakeholders shift towards a nature-positive economy, driven by policy changes, technological advancements, and consumer preferences. Additionally, liability risks emerge from legal actions related to ecosystem damage, while reputational risks can lead to boycotts or stock market collapses. The document highlights the nexus between climate and biodiversity, noting that nature can mediate climate hazards. For example, coastal wetlands were shown to reduce storm surge-related property damage in the northeast United States by an average of 20 per cent during Superstorm Sandy.

Mapping of existing approaches to measure biodiversity-related financial risks, impacts and dependencies

Measuring biodiversity-related financial risks is an emerging field relying on primary, secondary, and modelled data. Key metrics used to quantify these impacts include Mean Species Abundance (MSA), which measures local biodiversity intactness on a scale where 1 represents a fully intact ecosystem. The Species Threat Abatement and Restoration (STAR) metric helps identify opportunities to reduce extinction risks, while the Potentially Disappeared Fraction (PDF) reflects the percentage of species richness lost due to environmental pressures. Biodiversity Intactness Index (BII) and the Biodiversity Impact Metric (BIM) are further tools used to understand supply chain impacts.

The ENCORE tool is a prominent database allowing financial institutions to assess 21 ecosystem services and their interdependence with 86 production processes. De Nederlandsche Bank (DNB) utilised ENCORE to find that Dutch financial institutions financed companies highly dependent on ecosystem services to the value of EUR 510 billion. Other modelling approaches include the Corporate Biodiversity Footprint (CBF) and macroeconomic assessments using Integrated Assessment Models (IAMs) like AIM, GCAM, and MESSAGE. These models help determine the materiality of nature loss. For example, research suggests that 15 out of 26 sovereigns assessed would face a credit rating downgrade of one notch or more under a “partial ecosystem services collapse” scenario.

Public policy serves as a significant source of transition risk. Target 3 of the GBF commits countries to protecting 30 per cent of land and sea areas by 2030, a major increase from previous targets. Economic instruments for protection include taxes on pesticides and fertilisers, fees for groundwater abstraction, and tradable permits. The reform of environmentally harmful support is also critical; between 2019 and 2021, 54 economies provided approximately USD 611 billion per year in agricultural producer support, of which 64 per cent was considered potentially harmful to the environment.

Challenges, gaps and considerations for next steps

The translation of biodiversity loss into financial risk is hindered by several challenges, including the localised and multidimensional nature of biodiversity. Unlike the “net zero” target for climate change, no single metric exists for a “nature-positive” outcome. Gaps remain in data standardisation, the understanding of feedback loops, and the availability of geolocated asset data. There is also a need to better understand how microeconomic effects expand into wider systemic financial risks.

The OECD is currently developing a supervisory framework to assist central and retail banks in assessing these risks. This includes a two-year project to implement the framework within the Hungarian financial system. Future efforts must focus on improving the granularity of biodiversity data and its integration into financial decision-making. The OECD aims to publish the initial methodological framework by the autumn of 2023 to provide guidance on prioritisation and risk assessment processes for financial supervisors and market participants.