Nature and its relationship to the financial system

Nature and biodiversity underpin economic activity through ecosystem services such as water provision, pollination, climate regulation and soil health. These services are rapidly declining due to land- and sea-use change, resource exploitation, climate change, pollution and invasive species. Nearly one third of assessed species face extinction risk, and global wildlife populations have declined by over 70% since 1970.

Nature loss and climate change are interlinked and compound risks to economies and human wellbeing, including health, food security and livelihoods. Seven of nine planetary boundaries have already been transgressed, indicating that economic activity is operating beyond safe environmental limits. Deforestation, ecosystem degradation and biodiversity loss also reduce natural carbon sinks, increasing climate-related impacts.

Governments, central banks and investors increasingly recognise nature-related risks as financially material. More than half of global GDP is moderately or highly dependent on nature. Financial systems across multiple jurisdictions show significant exposure to ecosystem degradation through loans, assets and supply chains. International policy frameworks, including the Kunming–Montreal Global Biodiversity Framework, signal growing expectations for nature to be integrated into economic and financial decision-making, although implementation remains uneven.

How nature-related risks can impact investors

Nature-related risks affect investors through physical, transition and system-level channels. Physical risks arise from ecosystem degradation that disrupts production, assets and supply chains. Examples include water scarcity affecting agriculture, manufacturing and technology; pollinator loss increasing costs and threatening global crop output; invasive species driving rising economic damages; and extreme weather events intensified by ecosystem loss. These impacts translate into higher operating costs, credit deterioration, asset write-downs and increased insurance losses.

Transition risks stem from regulatory change, litigation, shifting consumer preferences and increased investor scrutiny. Policies such as deforestation regulations, biodiversity net gain regimes and enhanced due diligence requirements raise compliance costs and increase the risk of stranded assets for misaligned activities. Environmental litigation related to pollution and chemical use has resulted in multi-billion-dollar settlements, prolonged share price declines and reputational damage. Transition risks are uneven across sectors and regions, increasing the likelihood of disorderly adjustment.

System-level risks arise from cumulative nature degradation and the potential crossing of environmental tipping points. These risks are non-diversifiable and can generate macroeconomic shocks, supply chain disruption, inflation and reduced productivity. Modelling indicates that the collapse of key ecosystem services could lead to multi-trillion-dollar GDP losses by 2030, with global spillovers. While company-level evidence remains limited, system-level risks are expected to amplify existing physical and transition risks.

How investors can respond

Investors have fiduciary reasons to integrate nature-related considerations into investment strategies, stewardship and risk management. Addressing nature loss can reduce exposure to systemic economic disruption, stranded assets and long-term value erosion. Investors are increasingly using portfolio screening to identify high-risk sectors and prioritise issues such as deforestation, water stress and pollution.

Assessment practices remain constrained by data gaps and limited valuation methodologies. Current approaches focus on sector-specific analysis, qualitative scenario assessment and stress testing, supported by emerging frameworks such as the TNFD LEAP approach. Engagement with investee companies, peers and collaborative initiatives is critical to improving governance, disclosure and data quality.

Investors are also exploring nature-related investment opportunities, including nature-based solutions, labelled debt, thematic equity, real assets and blended finance. Although private finance for nature has increased significantly, it remains below levels required to meet global biodiversity goals. Policy engagement is identified as a key lever to reduce transition uncertainty, improve market signals and enable scalable investment aligned with nature-positive outcomes.