Economic and financial impacts of nature degradation and biodiversity loss

Nature is crucial to human wellbeing and provides essential ecosystem services that support economic activity. However, the economic value of these services is often undervalued because they are not traded in markets or given a direct monetary value. Nature degradation, including biodiversity loss, threatens the continued provision of these critical services, potentially leading to significant macroeconomic consequences that affect price and financial stability. Recent analysis by the European Central Bank (ECB) revealed that nearly three-quarters of the euro area economy and financial system are critically dependent on healthy ecosystems. Therefore, a systematic, proactive and comprehensive approach to quantifying and assessing the impact of escalating nature-related economic and financial risks on price and financial stability is essential. This article discusses the implications from a central banking perspective, emphasising the importance of an integrated approach to climate change and nature-related risks. It further explores the impact of these risks on our economy and seeks a deeper understanding of the physical impacts of climate change. JEL Classification: C80, C60, G21, Q20, Q50