Nature provides goods and services which we depend on, yet one-fifth of these services are on the verge of collapse.

It only takes 3% of the Amazon rainforest being deforested to cause disruption in the local water cycle, and with it, local food production. The cost of reversing this is estimated at US$257 billion alone. Meanwhile by protecting the forest, we are able to adequately generate US$329 billion of additional wealth.

This paper makes the case for why assessing and integrating nature-related financial risks are important.

To avoid irreparable damage to nature, banks and investment firms have developed use cases showing that:

• Financial firms can already measure nature-related financial risks with existing tools and data.
• Nature loss creates material financial risks, leading to valuation declines approaching 50% and multiple-notch credit rating downgrades.
• Risks quantified are only the tip of the iceberg; wider risks to tax revenues, supply chains, social cohesion and financial markets will greatly amplify the negative consequences of nature loss.

To assess nature-related risks into financial decision-making the CISL has provided a framework which includes, the:

• Type of risk
• Risk manifesting as a result of the different types of risks
• Impact on companies
• Resulting financial risk

Type of risk refers to three different types of risks. (physical, transition and liability). Physical risk refers to ecosystem services at risk due to degradation of nature. Transition risk refers to the policies and regulations in response to nature loss, and liability risk refers to the potential legal actions taken against institutions.

To integrate nature-related risks into financial decision-making the CISL has outlined four different points:

• Recognition
• Mapping
• Assessment
• Integration

Financial institutions are now allocating additional resources to assessing nature-related financial risks.

Use cases outlined in the report show that:

• Micro prudential assessments of nature-related risks are possible.
• Nature loss and responses to that loss are causing double-digit valuation declines in percentage terms, and multiple-notch credit rating downgrades.
• Nature-related financial risks are highly material.
• Most use cases focus on first-order impacts, meaning wider risks to tax revenues, supply chains, social cohesion and financial markets are unaccounted for.
• Without investment in nature today, exposure to nature-related risks and global warming may become harder and harder to mitigate.
• Identifying nature-related financial risks could create a pipeline of investable nature-based solutions.

The paper also provides different ways to accelerate the integration of nature into financial decision making which includes: improving supply chain transparency; creating tools to automate risk assessment; generating more open-access environmental data; and, onboarding and supporting risk analysts.

With valuations at risk of declines approaching 50%, senior management of financial institutions need to begin dedicating resources to assessing nature-related financial risks.

Financial institutions can already begin these assessments, using existing use cases and frameworks as guides.

Voluntary initiatives and targets, policy and regulation, are already here with more on the way.

Overall, the integration of nature into financial decision-making can refresh the relationship between people and planet. Identifying and assessing nature-related financial risks are key steps for creating an economy with nature at its heart.

1. Financial institutions can integrate nature-related risks into financial decision-making by using existing tools and data to mitigate financial risks caused by nature loss.
2. Nature-related risk may lead to pricing externalities, stranded assets, and capital destruction.
3. It is important to identify nature-related financial risks across a portfolio. Whilst the risks posed by companies exposed to nature loss can be different, this data can begin to provide an indication of whether securities have a positive or negative impact on nature.
4. With drivers of nature loss and their impacts varying by geography, numerous place-based scenarios are required to adequately map nature-related risks. To make a start, the most financially material scenario and value chain combinations need to be covered, such as land degradation and its impact along the agriculture value chain.
5. Policies to protect and restore nature are imminent. In 2022, the UN Biodiversity COP looks set to halt and reverse nature loss by 2030, whilst in the EU, agendas such as the Farm to Fork Strategy aim to create a nature-positive food system.
6. Mandated disclosures that support policy goals are also emerging. In France, Article 29 of the Law on Energy and Climate requires that biodiversity-related risks and impacts be disclosed by financial institutions, whilst the Task Force on Climate-Related Financial Disclosures (TCFD) reporting includes financed emissions linked to land use change, such as deforestation.
7. The Taskforce on Nature-related Financial Disclosures (TNFD) has been launched. During 2022, TNFD piloted a beta framework, first published in March, that will enable financial institutions to report on their dependence and impact upon nature. The final version of the TNFD framework will be shaped by a broad group of corporates and financial institutions.
8. Nature-positive means halting and reversing the loss of nature by 2030 so that species and ecosystems begin to recover. It is a new operating model based on regeneration, resilience and circularity not extraction, destruction and pollution.
9. A nature-positive economy is one in which businesses, governments and others take action at scale to reduce and remove the drivers and pressures fuelling the degradation of nature, and work to actively improve the state of nature and the ecosystem services it provides.
10. Key tools and initiatives highlighted in the report to assist in integrating nature-related risks include: Taskforce on Nature-related Financial Disclosures (TNFD) pilot framework; CISL Handbook for Nature-related Financial Risks; EU Business@Biodiversity Guide; and. CISL’s Decision-making in a nature positive world.