Nature at Risk: Economic and Financial Implications

This document is an Occasional Paper that examines the economic and financial risks associated with the degradation of ecosystem services in the euro area. It highlights how the loss of biodiversity and ecosystem degradation can undermine productivity, disrupt supply chains, and increase vulnerability to economic shocks, thereby posing risks to both the real economy and the financial sector. The paper applies the nature value-at-risk (NVaR) framework to assess these risks, linking biophysical shocks to ecosystem services with sectoral production functions. Key findings indicate that water-related risks, such as surface water scarcity, are particularly significant, potentially exposing up to 24% of euro area output to risk under severe drought conditions. The analysis also reveals feedback loops between ecosystem degradation and bank portfolios, emphasizing the interconnectedness of economic activities and ecosystem health. The study concludes with recommendations for further research and the need for enhanced methodologies to better assess nature-related risks and their implications for financial stability.