The economy and the financial system have a complex and two-way relationship with nature. They are not only dependent on it, but also influence it and are influenced by it, which creates risks associated with nature. These risks are caused by the degradation of nature, including loss of biodiversity and ecosystem services (ES), which are crucial for human well-being and provide numerous benefits to society. A recent analysis has revealed how banks in the euro area are critically dependent on ecosystem services and how they also contribute to biodiversity loss through their biodiversity footprint.

Dependence on ecosystem services is high

Study shows that up to 72 % of the companies analysed in the euro area show high dependence on at least one ecosystem service. This represents almost 3 million entities whose production processes would face critical disruptions in the event of ecosystem degradation, directly threatening their financial viability. The sectors with the highest direct dependence include agriculture, forestry, fisheries, construction and heat and electricity generation. For example, agriculture is heavily dependent on pollination, soil fertility and the availability of surface water, while construction needs natural resources such as wood and minerals.

The most important ES on which societies in the euro area rely are water supply (from surface and groundwater sources), land stabilisation and erosion control, flood and storm protection and climate regulation. These services, primarily provided by vegetation cover, are essential for protecting economic activities from climate risks such as floods and heat waves. Overall, it is estimated that 75% of % loans provided to companies in the euro area, representing almost €3.2 trillion, have a high level of dependence on at least one ecosystem serviceThe largest volume of loans was provided to companies in the manufacturing, wholesale and retail trade, and real estate sectors.

The biodiversity footprint of the banking system

Banks play a key role in enabling companies to function, but at the same time, through their lending and trading activities, they can support economic sectors that affect the state of ecosystems and biodiversity, potentially exacerbating their degradation. The biodiversity footprint of the euro area economy is estimated at the loss of more than 580 million hectares of native habitats worldwide, which is approximately equivalent to 60 % of the European mainland. The greatest impact is observed directly in the euro area, where economic activities take place, but significant impacts are also transmitted to Asia and Africa through dependencies in supply chains, mainly due to demand for agricultural, mining and manufacturing products.

The sectors financed by banks in the euro area that have the greatest impact on biodiversity are manufacturing, agriculture and electricity generation. It is found that 100 banks out of 2,500 analysed are responsible for 87% of the total biodiversity footprint of the Eurozone banking systemEven just the 10 largest banks in terms of their biodiversity footprint finance almost 40% of the total biodiversity footprint.

Combined climate and nature risks

Ecosystem degradation and biodiversity loss can pose risks to the financial system by affecting companies’ production processes and consequently impairing their ability to repay debts. Moreover, these risks are exacerbated by climate changeClimate hazards such as drought, heat waves, floods and sea level rise degrade ecosystems, while healthy ecosystems mitigate climate impacts by sequestering carbon and dampening disturbances.

The analysis revealed that almost 60% of % loans in the euro area are exposed to companies facing unmet flood protection needs. This means that ecosystems do not provide sufficient protection, which increases the vulnerability of companies. Similar concerns apply to companies heavily dependent on surface water supplies and exposed to increased drought risk. The highest risk for companies and banks in the euro area is likely to be through combined effects of different climate risks, in particular droughts and floods, droughts and heatwaves, and forest fires and heatwaves. The loss of ecosystem services can significantly amplify these impacts.

The need for integrated risk management

To avoid underestimating the risks to the economy and the financial system, it is essential integrated approach to risk assessment, which takes into account the combined effects of climate change and ecosystem degradation. Although these risks are often analyzed in isolation, their interaction can lead to nonlinear, cascading impacts on economic output and the financial system. Addressing this climate-nature linkage is a key step towards more realistic estimates of systemic risk and shaping policies that better align climate change mitigation with nature conservation objectives.

The study highlights that urgent action is needed while the window of opportunity remains. It is essential that restoration and conservation efforts are carried out in synergy with climate change mitigation and adaptation efforts to minimize future risks for banks and ensure financial stability. JRi

The study was published in the journal Nature