Managing Environmental Threats: Integrating Nature-Related Risks into Investment Decisions and the Financial System

This chapter explores the characteristics of nature-related risks and their implications for the development of adequate risk management approaches by financial and investment decision-makers. A central idea developed in this chapter is that nature-related risks call for specific responses in terms of threat management in the financial sector given their threat to the stability of both the financial sector and the global economy. However, when looking at current practices, it appears that financial institutions and investors have so far failed to include these risks in their management and decision-making processes. This chapter examines the current state of the literature with regard to the conceptualization of nature-related risks and then studies the latter’s characteristics and their possible transmission pathways into the financial system and their potential to undermine the stability of the global economy. It further sheds light on the potential policy measures that could be adopted to provide for a better mitigation of these risks. Finally, this chapter tackles the issue of what the absence of complete certainty for assessing nature-related risks entails in terms of precautionary approaches and trade-offs for financial decision-makers. Overall, looking at current financial practices, it is clear that new approaches need to be developed in terms of risk management, including the adoption of new measurement methods and frameworks for mitigating these risks.