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Living in a world of disappearing nature: physical risk and the implications for financial stability

Author

Listed:
  • Lelli, Chiara
  • Parisi, Laura
  • Heemskerk, Irene
  • Boldrini, Simone
  • Ceglar, Andrej

Abstract

The loss of biodiversity and the degradation of natural ecosystems pose a significant threat to the broader economy and financial stability that central banks and financial supervisors cannot ignore. To gain further insights into the implications of nature and ecosystem service degradation for financial stability, this study assesses the dependencies of euro area non-financial corporations and banks on different ecosystem services. The study then develops a method to capture banks’ credit portfolio sensitivity to possible future changes in the provision of ecosystem services. Our results show that 75% of all corporate loan exposures in the euro area have a strong dependency on at least one ecosystem service. We also find that loan portfolios may be significantly affected if nature degradation continues its current trend, with greater vulnerabilities concentrated in certain regions and economic sectors. JEL Classification: C55, G21, G38, Q5

Suggested Citation

  • Lelli, Chiara & Parisi, Laura & Heemskerk, Irene & Boldrini, Simone & Ceglar, Andrej, 2023. "Living in a world of disappearing nature: physical risk and the implications for financial stability," Occasional Paper Series 333, European Central Bank.
    • Handle: RePEc:ecb:ecbops:2023333
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpops/ecb.op333~1b97e436be.en.pdf
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    References listed on IDEAS

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    1. Konstantin Stadler & Richard Wood & Tatyana Bulavskaya & Carl†Johan Södersten & Moana Simas & Sarah Schmidt & Arkaitz Usubiaga & José Acosta†Fernández & Jeroen Kuenen & Martin Bruckner & Stefan, 2018. "EXIOBASE 3: Developing a Time Series of Detailed Environmentally Extended Multi†Regional Input†Output Tables," Journal of Industrial Ecology, Yale University, vol. 22(3), pages 502-515, June.
    2. Stefano Battiston & Antoine Mandel & Irene Monasterolo & Franziska Schütze & Gabriele Visentin, 2017. "A climate stress-test of the financial system," Nature Climate Change, Nature, vol. 7(4), pages 283-288, April.
    3. Costanza, Robert & de Groot, Rudolf & Braat, Leon & Kubiszewski, Ida & Fioramonti, Lorenzo & Sutton, Paul & Farber, Steve & Grasso, Monica, 2017. "Twenty years of ecosystem services: How far have we come and how far do we still need to go?," Ecosystem Services, Elsevier, vol. 28(PA), pages 1-16.
    4. Unai Pascual & Patricia Balvanera & Christopher B. Anderson & Rebecca Chaplin-Kramer & Michael Christie & David González-Jiménez & Adrian Martin & Christopher M. Raymond & Mette Termansen & Arild Vatn, 2023. "Diverse values of nature for sustainability," Nature, Nature, vol. 620(7975), pages 813-823, August.
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    Cited by:

    1. Sebastien Gallet & Antje Hendricks & Julja Prodani, 2024. "The ecosystem service degradation sensitivity indicator (EDSI): A new framework for understanding the financial risk repercussions of nature degradation," Working Papers 814, DNB.
    2. Hackmann, Angelina, 2024. "Bridging the biodiversity financing gap," SAFE White Paper Series 103, Leibniz Institute for Financial Research SAFE.
    3. Ceglar, Andrej & Boldrini, Simone & Lelli, Chiara & Parisi, Laura & Heemskerk, Irene, 2023. "The impact of the euro area economy and banks on biodiversity," Occasional Paper Series 335, European Central Bank.

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    More about this item

    Keywords

    biodiversity loss; economy; ENCORE; impact; input-output table; materiality score; nature degradation; nexus;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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