Nature loss and risk is rising up the agenda:

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Nature-related risks are becoming increasingly important for both investors and corporates. The material impact of nature loss and its associated risks are fast becoming strategic priorities for corporates, investors, and financial regulators.

The growing realisation that nature loss can pose significant physical, transition, and systemic risks has pushed this issue to the top of the agenda for corporates and financial institutions. In recent weeks, we’ve seen nature-related issues rise up the news cycle. Here’s an overview of some significant news items.

Frank Elderson, Executive Board member of the ECB, has warned that nature loss poses significant risks to the global economy and financial system. He argues that central banks and financial supervisors need to understand how vulnerable economies and the financial system are to this degradation, evidenced by the preliminary results of a forthcoming ECB report which indicate that 75% of bank loans in the euro area and 72% of euro area companies are highly dependent on ecosystem services. Full results are expected this autumn.

Humanity needs nature to survive, and so do the economy and banks.
The more species become extinct, the less diverse are the ecosystems on which we rely.
This presents a growing financial risk that cannot be ignored”

Frank Elderson, Executive Board member of the ECB

The Institute and Faculty of Actuaries (IFoA) published an action list to increase understanding of nature-related risks among insurance actuaries. The report highlights the relevance of biodiversity and nature-related risks, and urges the profession to integrate nature-related risks into risk management systems – including risk registers, matrices, and frameworks — in order that they are managed alongside traditional risk.

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Banco de México published a report on nature-related dependencies and impacts on the Mexican banking sector, indicating that an “important share” of the credit portfolio of Mexican banks is “highly or very highly” dependent on nature, subjecting them to nature-related physical and transition risks -but the report also sights opportunities saying “there is a big potential for Natural Capital to be restored in Mexico”.

An important share of the credit portfolio of [Mexican] banks is highly or very
highly dependent on nature and its ecosystem services. As a result, it is
subject to physical risks arising from biodiversity loss and ecosystems
. “

Banco de México, 2023

The Financial Times reports that nature-related risks are rapidly rising up business and investor agendas and both are increasingly looking to understand and limit their contribution to nature loss, partly prompted by pressure to disclose their risks to climate and environmental damage. While there are no standard disclosure practices yet, the TNFD Recommendations published this September will provide guidelines for reporting.

“We see biodiversity loss as a top global risk and, as an investor,
we are trying to work out how this affects the value of our portfolios,” 

Rupert Krefting, Head of Stewardship at M&G Investments

A new report by Moody’s Investors Service identified five sectors with over $1 trillion in rated debt that face high exposure to physical climate and nature-related risks. The five sectors identified include mining, coal mining & coal terminals, integrated oil and gas, protein and agriculture, and environmental services and waste management. Risks identified included reclamation and rehabilitation costs for mining companies, abandonment liabilities due to physical damage to ecosystems for oil and gas companies to disrupted operations from extreme weather events for agriculture and protein companies with fixed operating assets in vulnerable locations.

Moody’s found that 40% of issuers have highly negative exposure to a range of these risks within the five sector. The report also highlighted the risks for sovereign issuers from physical climate and nature-related factors, noting that countries with high exposure to these risks are often those with lower income levels and weaker balance sheets, limiting their ability to address these risks.

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A Forbes feature article analyses developments in nature-related reporting and disclosures and reports that investor demand for risk management decision data is driving increased growth in companies trying to understand their dependencies and impacts on nature.

All 163 economic sectors analysed by PwC have a portion of their
direct operations or supply chain that is highly dependent on nature.

Felicia Jackson, Forbes, 2023

Both investors and corporates also recognise that this is not just about risk. The feature points to the recent Future of Nature and Business report which estimated that a drive for nature-positive transition could generate up to $10.1 trillion in annual business value and create 395 million jobs by 2030. While emissions footprint reporting is already mainstream, businesses are increasingly pressured to report on their impacts and dependencies on nature, highlighting the importance of addressing nature risk due to its impact on a company’s financial performance, reputation, and social license to operate.

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We are committed to providing timely and accurate information, insights, and expert perspectives on the TNFD framework, its development process, and broader nature-related issues.

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