Published : 6 days ago, on 02/12/2024

Sebastian Leape, CEO of Natcap

By Sebastian Leape, CEO of Natcap

Financial institutions have mastered climate risk assessment, they must now urgently expand their risk management capabilities to address nature risk (the financial exposure from degradation of ecosystems, biodiversity loss, and depletion of natural resources), which impact over $44 trillion in global economic value and face increasing regulatory scrutiny.

The regulatory landscape is shifting rapidly. The Corporate Sustainability Reporting Directive (CSRD) now mandates thousands of companies to report on nature-related metrics, while the Taskforce on Nature-related Financial Disclosures (TNFD) framework provides structured guidance for financial institutions to assess their nature exposure. For banks, asset managers, and insurers, this creates both compliance obligations and new opportunities to differentiate their service offerings.

The financial implications are significant. The World Economic Forum estimates that more than half of global GDP is moderately or highly dependent on nature. This exposure manifests across lending portfolios, from agriculture and real estate to infrastructure and consumer goods. Banks funding companies in high-impact sectors face increased regulatory scrutiny and potential stranded asset risks if nature-related regulations tighten further.

Early adopters in the financial sector are already taking action. The Norinchukin Bank, Japan’s leading agricultural bank, has published an integrated climate and nature strategy that sets a new standard for the industry. Meanwhile, major asset managers are incorporating biodiversity metrics into their ESG frameworks, recognising that nature risk often materialises faster than climate risk and requires distinct mitigation strategies.

Think of a $50m salmon farm in Norway: Climate change might gradually warm waters over decades, but a toxic algal bloom from ocean pollution can wipe out an entire season’s stock in just days. In 2019, this exact scenario killed 8 million salmon in northern Norway – instantly vaporising millions in revenue and triggering loan defaults. That’s nature risk in action: swift, severe, and often with no warning.

However, significant challenges remain in implementation. Unlike climate risk, which can be measured through standardised carbon metrics, nature risk requires analysis of multiple, location-specific factors like water stress, biodiversity loss, and ecosystem degradation. This complexity has historically made it difficult for financial institutions to incorporate nature risk into their existing risk management frameworks.

The good news is that technological solutions are emerging to address these challenges. New platforms combine satellite data, machine learning, and scientific databases to provide financial institutions with automated nature risk assessment capabilities. These tools can analyse entire lending portfolios or investment universes to identify nature-related exposures and opportunities, enabling banks to:

– Screen loan applications for nature-related risks

– Monitor ongoing exposure across lending portfolios

– Identify transition opportunities in nature-positive sectors

– Meet regulatory reporting requirements efficiently

– Develop new green financial products

For financial institutions, the message is clear: nature risk is becoming a core component of financial risk management. Those who develop the capabilities to assess and act on nature-related risks now will be better positioned to protect their portfolios and capture new opportunities in the transition to a nature-positive economy.

The technology and frameworks to implement robust nature risk management already exist. For financial institutions, the question is no longer whether to act, but how quickly they can build these capabilities into their operations. In an increasingly nature-conscious regulatory and business environment, this could be the difference between leading the transition or playing catch-up.