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Financial risk is inherently linked to natural hazards

Nature's instability poses a direct threat to investors' financial stability, leaving no room for denial that natural risks are financial risks. Key stakeholders such as asset owners, central banks, and institutions like the International Monetary Fund have an implied duty to acknowledge and...

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Financial dangers are inherently linked to environmental risks
Financial dangers are inherently linked to environmental risks

Financial risk is inherently linked to natural hazards

In the rapidly changing global economy, financial institutions are facing a new challenge: nature-related risks. These risks, which include biodiversity loss, water scarcity, and supply chain disruptions, are no longer abstract concepts but recognized financial risks with real-world consequences.

To address these risks, new tools and initiatives are emerging. One such tool is ENCORE (Exploring Natural Capital Opportunities, Risks, and Exposure), a free online platform developed by Global Canopy and UNEP FI. ENCORE helps financial institutions and businesses identify their dependencies and impacts on natural capital across various sectors, facilitating better risk assessment and management of nature-related financial exposures.

The platform enables users to map how sectors depend on and affect ecosystem services, such as freshwater, soil quality, pollination, and climate regulation, which are critical for assessing operational and supply chain risks.

Another initiative is the Taskforce on Nature-related Financial Disclosures (TNFD). This global framework guides companies and financial institutions in nature-related risk disclosure. Financial institutions are increasingly expected to demand TNFD-aligned reporting from portfolio companies to evaluate natural capital risks and opportunities.

Several long-term investors are already using these tools and initiatives. Norway’s Government Pension Fund Global, for instance, assesses about 96% of its portfolio for nature-related financial risks to anticipate environmental shocks that could affect long-term asset values. Finland’s State Pension Fund is exploring ways to quantify nature-related financial risks concerning its pension liabilities. Temasek Holdings (Singapore) is deploying satellite monitoring and biodiversity data to evaluate nature risks and opportunities in its investments.

These tools and frameworks support asset owners in embedding nature-related considerations into governance, risk management, and portfolio strategies. They help proactively manage risks such as biodiversity loss, water scarcity, supply chain disruption, and regulatory transitions.

Integrating natural capital approaches goes beyond compliance, aiming for nature-positive value creation. This includes assessing ecosystem service dependencies, regulatory exposures, reputational risks, and uncovering opportunities for cost savings and enhanced brand recognition.

In summary, pension funds and sovereign wealth managers are leveraging ENCORE to identify sector-level nature risks and dependencies, while aligning with TNFD to improve disclosure and risk management. By integrating these insights deeply into investment analysis and stewardship strategies, they aim to safeguard long-term financial performance against nature-related risks.

As asset owners, central banks, and institutions like the IMF take on the responsibility to integrate this recognition into all their activities, the future of finance seems to be shifting towards a more sustainable and resilient path.

  1. Recognizing nature-related risks as financial risks with real-world consequences, financial institutions and businesses are employing tools like ENCORE to identify their dependencies and impacts on natural capital, aiding in better risk assessment and management.
  2. ENCORE helps map sectors' dependencies on and impacts on ecosystem services, such as climate regulation, pollination, and water availability, crucial for assessing operational and supply chain risks.
  3. The Taskforce on Nature-related Financial Disclosures (TNFD) serves as a global framework, guiding companies and financial institutions to disclose nature-related risks and opportunities, with financial institutions demanding TNFD-aligned reporting from portfolio companies.
  4. Long-term investors like Norway’s Government Pension Fund Global, Finland’s State Pension Fund, and Temasek Holdings (Singapore) are using these tools and frameworks to anticipate environmental shocks, quantify nature-related financial risks, and make informed investment decisions.
  5. By integrating natural capital approaches, asset owners aim for nature-positive value creation, assessing ecosystem service dependencies, regulatory exposures, reputational risks, and unearthing opportunities for cost savings and enhanced brand recognition.
  6. Asset owners, central banks, and institutions like the IMF are integrating nature-related considerations into all their activities, signaling a shift towards a more sustainable and resilient financial future, focusing on climate change, biodiversity, and environmental-science to achieve the United Nation's Sustainable Development Goals (SDG) and mitigate nature-related risks in finance, business, and the environment.

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