Introduction

The report explores the emerging discipline of nature risk management in financial institutions. It highlights nature loss’s significant impact on the economy and the critical role of nature’s resilience in combating climate change. The survey, based on responses from 48 firms, indicates that nature risk management is in its infancy, with much work needed for quantification and integration.

Key takeaways

• Regulatory focus on nature risks is increasing, with 31% of firms reporting formal expectations from regulators.
• Nearly half of the boards have oversight of nature-related risks and opportunities.
• C-Level executives, particularly Chief Risk Officers (CROs), are accountable for nature-related risk management in most firms.
• Expertise in nature risk is relatively low compared to climate risk.
• Only 25% of firms have identified nature-related risks or opportunities, and just 8% have created specific nature-related products.

Governance

Effective governance involves board and senior management engagement. Nearly half of the surveyed firms’ boards oversee nature-related risks, with discussions on various topics, including nature-related physical and transition risks, biodiversity, and pollution. C-Level executives, mainly CROs, are responsible for nature risk management, often developing dashboards to present nature-related information.

Strategy

Firms need to understand the dependencies and impacts on nature within their portfolios. Strategic engagement with nature risk is low, with only 25% of firms identifying risks or opportunities. Specific nature-related products are uncommon, and aligning strategies with climate risk is a common challenge. Availability of data and reliable models are significant short-term concerns.

Risk management

Nature risk management is new for many firms, with most assessing drivers of nature change, such as climate change and deforestation. Only 35% have conducted materiality assessments. Firms embed nature risk into existing risk types, primarily credit and reputational risk, and perform qualitative due diligence. Only 8% have a nature-related risk appetite statement.

Metrics, targets, and limits

Seventeen percent of firms use metrics, targets, or limits for managing nature risks, with another 12% implementing them. Metrics for climate change are most common, followed by pollution and resource exploitation. Firms are waiting for common metrics before developing targets or limits.

Scenario analysis

Just under 20% of firms use scenario analysis for nature-related risks, with 50% planning to do so. Firms use scenario analysis to assess financial impacts, identify risks, and support strategy development.

Disclosures

Thirty percent of firms disclose nature-related governance, strategy, or risk management information. Public announcements include commitments to responsible banking and biodiversity pledges.

Maturity model scores for nature risk management

The maturity model scores firms on governance, strategy, risk management, metrics, targets, limits, scenario analysis, and disclosures. Most firms score better in governance and strategy, with lower scores in metrics, targets, limits, and scenario analysis. The maturity model highlights the early stages of nature risk management.

Conclusions

Nature risk management is in its early stages, similar to climate risk management in 2019. Firms face challenges such as data availability, regulatory uncertainty, and staffing. The financial system’s role in transitioning to a nature-positive world is crucial, with good risk management practices as a foundation.