A framework for nature-related risk

The document categorises nature-related risks into three main types: physical risks, transition risks, and systemic risks. Physical risks arise from changes in natural systems, such as wildfires, floods, or long-term climate shifts. Transition risks stem from evolving policies, market preferences, or technology aimed at achieving nature-positive practices. Systemic risks reflect the widespread impacts of ecosystem collapse on financial and operational stability.

These risks are interrelated, with dependencies between natural assets and economic systems amplifying vulnerabilities. Poorly managed risks can result in severe financial consequences, including regulatory fines, operational disruptions, and supply chain breakdowns.

Exposing the financial costs of nature-related risk

The study evaluates the financial implications of nature-related risks, focusing on 10 companies across industries such as energy, agriculture, chemicals, and shipping. It highlights the following insights:

• Diverse financial impacts: Losses varied significantly across companies, from six-figure fines to multi-billion-dollar liabilities. For instance, 3M faced over $10 billion in damages for water pollution caused by “forever chemicals”​, while PG&E incurred a $5 billion settlement due to wildfires, leading to bankruptcy​.
• Sector and geographic spread: The impacts were not limited to specific sectors or regions. Risks ranged from Tesla’s European operations being delayed by groundwater issues​ to deforestation-related reputational damage for JBS, which jeopardised its $20 billion US IPO​.
• Water and transition risks dominance: Half of the studied cases involved water-related dependencies. Transition risks, such as regulatory shifts and consumer expectations, accounted for eight of the 10 incidents. Examples include delays in Tesla’s European expansion and fines imposed on shipping company CMA CGM for non-compliance​.

Recommendation: Companies should systematically evaluate their exposure to high-materiality natural resources, particularly water, and adapt their operations accordingly.

Case studies

Detailed case studies emphasise the tangible financial and operational impacts of nature-related risks:

• 3M: A $10 billion liability stemmed from water pollution caused by improper disposal of “forever chemicals.” This illustrates the financial repercussions of neglecting environmental safeguards​.
• PG&E: Wildfires triggered by outdated infrastructure led to a $5 billion settlement, a sharp decline in share prices, and bankruptcy. The company has since pledged $18 billion to wildfire prevention and infrastructure upgrades​.
• Tesla: Delays in constructing its European plant arose from regulatory concerns about groundwater use, demonstrating how local environmental dependencies can disrupt global operations​.
• Bernard Matthews: A bird flu outbreak due to insufficient biosecurity led to £20 million in losses and damage to the brand’s reputation, resulting in workforce reductions​.

These cases illustrate how operational dependencies on natural resources and weak environmental governance can lead to financial losses, reputational damage, and legal liabilities.

Additional highlights

The report underscores the need for robust frameworks to identify and manage nature-related risks. The Taskforce on Nature-related Financial Disclosures (TNFD) provides a structured approach to integrating these risks into governance, strategy, and risk management processes. The LEAP framework (Locate, Evaluate, Assess, Prepare) helps organisations assess their dependencies and impacts across supply chains and operations​.