Introduction

This report provides guidance for financial institutions (FIs), primarily banks, on conducting a nature-based risk assessment (NBRA) and integrating project-related finance into that process. Nature is defined broadly to include biodiversity, water, soils and non-greenhouse gas pollution. The document responds to accelerating biodiversity loss, rising water stress and ecosystem degradation, and aligns with the 2022 Kunming–Montreal Global Biodiversity Framework (GBF).

Nature-based risk is framed through dependencies and impacts. Dependencies refer to how FI clients rely on ecosystem services such as water supply or pollination. Impacts refer to how activities degrade biodiversity or water resources, creating physical, transition and systemic risks. The report highlights evidence that nature degradation could reduce UK GDP by 12% by the 2030s, and that shocks linked to biodiversity loss could cost over USD 5 trillion globally. It emphasises that nature risk is location-specific and value-chain dependent.

Approach to a nature-based risk assessment

The report outlines a generic NBRA process applicable at portfolio or corporate level. It aligns with frameworks such as TNFD’s LEAP (Locate, Evaluate, Assess, Prepare), the Partnership for Biodiversity Accounting Financials (PBAF) Biodiversity Footprinting Standard, and UN Principles for Responsible Banking (PRB).

Preparation requires defined roles, senior sponsorship and, where necessary, external expertise. Governance should sit at senior level, potentially Chief Sustainability Officer or equivalent, given cross-cutting links to climate and social risk. Regular iteration is recommended, with annual reviews and full reassessments every three to five years.

Scoping determines which business units, geographies and nature elements are included. Prioritisation focuses on sectors with high biodiversity, water or pollution risk. High-risk sectors identified include agriculture, forestry, mining, fossil fuels, chemicals, textiles, power generation and construction.

Analysis involves collating location data, commodity exposure, existing policies and proximity to protected areas or water-stressed basins. Tools such as ENCORE, IBAT, WWF Biodiversity Risk Filter and Aqueduct are cited. Data should be sufficiently accurate to support action, even if initially imprecise. Heatmaps can combine sectoral risk with company-specific practices.

Action requires SMART targets. Practice targets may involve capacity building or TNFD disclosure. Impact targets may address exposure to water-stressed regions or high-biodiversity areas. The report recognises that early targets may focus on improving data quality before material impact reduction.

Reporting should disclose scope, methods, limitations and major risk areas, potentially aligned with TNFD, CSRD, GRI and CDP. Transparency is expected under Equator Principles and emerging biodiversity regulation.

Nature-based risk in project-related finance

Project-related finance, governed by Equator Principles (EP4) and IFC Performance Standards, already embeds nature risk management. Projects are categorised as A, B or C based on environmental and social risk. Category A projects involve significant, potentially irreversible impacts.

IFC Performance Standard 6 requires identification of Natural and Critical Habitat. Critical Habitat includes areas important for endangered species, endemic species, migratory species, unique ecosystems or key evolutionary processes. Where Critical Habitat is present, projects must achieve Net Gain in qualifying biodiversity features, applying the mitigation hierarchy and, where necessary, biodiversity offsets.

Water and pollution risk are addressed under Performance Standard 3. Projects must avoid or minimise pollution and prevent unacceptable water stress to third parties. Water risk depends on both demand and basin-level availability. Screening tools and baseline studies are recommended, including seasonal biodiversity surveys and desktop analysis using IBAT.

Risks to FIs include reputational damage, regulatory non-compliance, project delays and credit risk. Independent Environmental and Social Consultants may provide oversight. Public summaries and monitoring reports support lender transparency.

Non-project elements of project-related finance should also be assessed. This includes company-wide biodiversity policies, exposure to high-risk commodities, location of operations relative to biodiversity hotspots, and prior regulatory infringements.

The benefits of integrating project-related financing information into an NBRA

The report estimates that 55% of global GDP, equivalent to USD 58 trillion, is moderately or highly dependent on nature. Integrating project-related finance into NBRA offers practical benefits.

Project finance teams often hold high-quality, location-specific biodiversity and water data. This supports more granular risk assessment compared with model-based portfolio tools. It also promotes internal knowledge transfer and a holistic view linking nature, climate and social risk.

The report concludes that incorporating project-related financing from the outset provides a strong foundation for corporate-level NBRAs. This enhances efficiency, improves data quality and strengthens long-term institutional resilience as nature-related regulation and disclosure expectations expand.