Report on Nature-Related Financial Risks in the Euro Area and Implications for Sustainable Development Goals

Executive Summary

This report analyzes the dual relationship between the euro area’s economy, its financial system, and nature, highlighting significant dependencies and impacts that pose risks to financial stability and impede progress toward the Sustainable Development Goals (SDGs). The analysis reveals that economic activities are critically dependent on ecosystem services while simultaneously contributing to biodiversity loss, creating a feedback loop of escalating risk. These nature-related risks are compounded by climate change, threatening the achievement of multiple SDGs, including SDG 15 (Life on Land), SDG 13 (Climate Action), SDG 6 (Clean Water and Sanitation), and SDG 8 (Decent Work and Economic Growth).

• High Dependency: 72% of analyzed companies in the euro area exhibit high dependency on at least one ecosystem service, directly linking economic productivity to environmental health.
• Financial Exposure: An estimated 75% of corporate loans, valued at nearly €3.2 trillion, are granted to companies highly dependent on nature, exposing the banking sector to significant physical risks from ecosystem degradation.
• Concentrated Impact: A small fraction of the banking sector holds a disproportionate impact on biodiversity. Out of 2,500 banks, the top 100 are responsible for 87% of the total biodiversity footprint through their lending activities, highlighting a critical leverage point for promoting SDG 12 (Responsible Consumption and Production).
• Compound Risks: The convergence of nature degradation and climate hazards creates amplified threats. Nearly 60% of euro area loans are exposed to companies facing unmet flood protection needs, demonstrating a critical failure in resilience that undermines SDG 11 (Sustainable Cities and Communities) and SDG 13 (Climate Action).

Introduction: The Nexus of Finance, Nature, and Sustainable Development

A healthy biosphere is fundamental to human well-being and provides essential ecosystem services that underpin global economies. However, unsustainable economic growth has accelerated biodiversity loss and ecosystem degradation, jeopardizing the very foundation of our prosperity. This trend poses a direct threat to the 2030 Agenda for Sustainable Development, particularly SDG 15 (Life on Land) and SDG 14 (Life Below Water). More than half of the world’s GDP is dependent on these services, making their degradation a systemic risk to financial stability and the achievement of SDG 8 (Decent Work and Economic Growth). This report assesses the euro area’s exposure to these nature-related financial risks through two complementary dimensions:

1. Dependency on Ecosystem Services: An analysis of how corporate production processes rely on nature, representing physical risks from service disruption.
2. Biodiversity Footprint: An assessment of the environmental pressures exerted by financed activities, representing transition risks from policy, market, and reputational shifts aimed at protecting nature.

Furthermore, this report integrates climate-related risks, underscoring the interconnectedness of the biodiversity and climate crises and their combined threat to achieving SDG 13 (Climate Action).

Analysis of Euro Area Economic Dependency on Ecosystem Services

Sectoral Dependencies and Alignment with SDG 8 and SDG 9

The dependency on ecosystem services varies significantly across economic sectors, revealing vulnerabilities in key industries central to SDG 9 (Industry, Innovation, and Infrastructure). The sectors with the highest dependency include:

• Energy Production
• Agriculture, Forestry, and Fishing
• Manufacturing
• Transportation and Storage
• Mining and Quarrying

The financial system mirrors this dependency, with banks in France, Germany, Italy, and Spain granting the largest loan volumes to highly dependent sectors like manufacturing, trade, and real estate. This deep-rooted dependency means that ecosystem collapse would trigger severe disruptions, impairing corporate creditworthiness and threatening financial stability, thereby challenging the sustainability of economic growth as targeted by SDG 8.

Critical Ecosystem Services for Sustainable Operations (SDG 6, SDG 15)

The euro area economy relies heavily on a range of regulating and provisioning services that are directly linked to core SDGs.

• Water Provision (SDG 6): Surface and groundwater resources are the most critical ecosystem services, essential for agriculture, manufacturing, and energy production. Their degradation poses a direct threat to water security and economic output.
• Regulation and Protection (SDG 15): Services such as mass stabilization, erosion control, flood protection, and climate regulation are vital for protecting economic assets and infrastructure from natural hazards. The health of terrestrial ecosystems is therefore a prerequisite for economic resilience.

A significant portion of this dependency is indirect, embedded in global supply chains originating from North America and Asia. This highlights the global nature of risk and the need for international cooperation in line with SDG 17 (Partnerships for the Goals).

Assessing the Biodiversity Footprint and its Impact on Global Goals

Quantifying the Impact on Life on Land (SDG 15)

While depending on nature, the euro area economy simultaneously exerts immense pressure on it. The biodiversity footprint of euro area companies in 2021 is estimated to be equivalent to the degradation of over 580 million hectares of pristine habitats globally—an area approximately 60% of the size of Europe. This staggering impact, driven by land use and climate change pressures, represents a profound failure to protect, restore, and promote sustainable use of terrestrial ecosystems as mandated by SDG 15.

The Role of the Financial Sector in Driving Biodiversity Loss

The financial sector acts as a key enabler of activities that degrade biodiversity. The analysis shows a highly concentrated impact:

• The 10 largest banks, by footprint, finance nearly 40% of the total biodiversity impact.
• The top 100 banks are responsible for 87% of the cumulative impact.

This concentration offers a strategic opportunity for targeted regulatory and corporate action to realign financial flows with nature-positive outcomes, supporting the Kunming-Montreal Global Biodiversity Framework and related SDGs.

Global Supply Chains and Responsible Production (SDG 12)

The biodiversity footprint of the euro area extends far beyond its borders, with significant impacts in Asia and Africa. This is largely driven by the demand for agricultural, mining, and manufacturing products, linking consumption in Europe to habitat loss and land conversion elsewhere. This dynamic underscores the urgent need to transition toward sustainable consumption and production patterns, a core objective of SDG 12, by ensuring that supply chains are transparent, sustainable, and equitable.

Compound Risks: Climate Change and Ecosystem Degradation

Amplified Threats to Climate Action and Resilience (SDG 13, SDG 11)

Climate change and nature degradation are not separate crises but interconnected forces that create compound risks. Healthy ecosystems are critical for climate mitigation (e.g., carbon sequestration) and adaptation (e.g., flood protection). Their degradation weakens our resilience to climate hazards, undermining progress on SDG 13.

The analysis reveals two distinct communities of risk:

1. A core group of interconnected climate hazards (drought, heat stress) and critical ecosystem services (water provision, soil stability).
2. A second group of other ecosystem services.

These communities are linked by crucial services like flood protection and climate regulation, which act as channels for risk amplification. For instance, the loss of flood protection services magnifies the damage from climate-driven extreme rainfall, threatening urban and rural communities and jeopardizing SDG 11.

Financial System Exposure to Compounded Nature-Climate Risks

The euro area banking system is significantly exposed to these compounded risks through its loan portfolios. Key findings include:

• Flood Risk: Over 60% of loans are granted to companies in areas where the demand for flood protection is unmet by ecosystems. More than 15% of the entire loan portfolio is exposed to companies facing both high flood risk and high dependency on failing flood protection services.
• Drought Risk: Over 40% of the total loan portfolio is granted to companies that are highly exposed to drought and highly dependent on surface water provision, with a heavy concentration in southern and western Europe.

This exposure highlights a systemic vulnerability that current risk management frameworks, which often treat climate and nature as separate issues, fail to capture adequately.

Policy Implications and Recommendations for Achieving the SDGs

Integrating Nature into Financial Risk Management

To ensure financial stability and support the SDGs, financial institutions and regulators must move beyond a narrow focus on climate risk. An integrated approach that recognizes the climate-nature nexus is imperative. This requires developing new models and metrics to assess compound risks, including physical risks from ecosystem collapse and transition risks from policies aimed at halting biodiversity loss.

Aligning Financial Flows with Global Biodiversity and Climate Goals

Financial flows must be systematically realigned to support, rather than undermine, global environmental objectives. This involves:

• Implementing policies that steer investment away from activities with a high biodiversity footprint, in line with SDG 12 and SDG 15.
• Supporting nature-based solutions that offer dual benefits for climate mitigation (SDG 13) and biodiversity conservation (SDG 15).
• Ensuring that financial activities are consistent with the targets of the Kunming-Montreal Global Biodiversity Framework.

The concentration of impact within a small number of banks provides a clear target for engagement and regulation to accelerate this transition.

Analysis of Sustainable Development Goals (SDGs) in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article addresses several interconnected Sustainable Development Goals (SDGs) by focusing on the critical relationship between the economy, financial systems, and the natural environment. The primary SDGs identified are:

• SDG 15: Life on Land

  This is a central theme, as the article extensively discusses biodiversity loss, ecosystem degradation, and the economic dependency on terrestrial ecosystem services like soil fertility, erosion control, and forest resources. It quantifies the “biodiversity footprint” of economic activities, directly linking them to the degradation of pristine habitats, which aligns with the core objectives of SDG 15.

• SDG 13: Climate Action

  The article explicitly links nature degradation with climate change, highlighting how they create “compound financial risks.” It analyzes companies’ exposure to climate hazards such as floods, droughts, and heatwaves and discusses how healthy ecosystems provide climate regulation and mitigation services (e.g., carbon sequestration). This directly connects to the need for climate resilience and integrated policy action.

• SDG 8: Decent Work and Economic Growth

  The analysis connects environmental health to economic stability. It demonstrates that a significant portion of the euro area economy (“72% of the analysed companies”) is highly dependent on ecosystem services. The degradation of these services poses a direct threat to companies’ production processes, financial viability, and ability to repay debt, thereby jeopardizing sustainable economic growth.

• SDG 6: Clean Water and Sanitation

  The article identifies “water provision from surface and ground water resources” as the most critical ecosystem service for many economic sectors, including agriculture, manufacturing, and energy. The discussion of drought risks and dependency on water provision directly relates to the sustainable management of water resources, a key focus of SDG 6.

• SDG 12: Responsible Consumption and Production

  The article examines the impact of production patterns on biodiversity through the concept of a “biodiversity footprint.” It highlights how financial institutions, through their lending practices, support economic sectors (manufacturing, agriculture) that contribute to nature degradation. This calls for more responsible corporate and financial practices, aligning with the goals of sustainable production.

• SDG 17: Partnerships for the Goals

  By analyzing the role of the financial system (banks) and advocating for “nature-aligned economic policies” and “integrated risk assessment,” the article touches upon the financial mechanisms needed to achieve sustainable development. It underscores the need for policy coherence between climate and nature objectives, which is a key aspect of SDG 17.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the article’s detailed analysis, several specific SDG targets can be identified:

1. Under SDG 15 (Life on Land):

   • Target 15.1: By 2020, ensure the conservation, restoration and sustainable use of terrestrial and inland freshwater ecosystems and their services. The article’s focus on the degradation of pristine habitats due to economic activities and the dependency on services like water provision and flood protection directly relates to this target.
   • Target 15.5: Take urgent and significant action to reduce the degradation of natural habitats, halt the loss of biodiversity and, by 2020, protect and prevent the extinction of threatened species. The calculation of a “biodiversity footprint” equivalent to the loss of over 580 million hectares of pristine habitats is a direct measure of progress (or lack thereof) toward this target.
   • Target 15.9: By 2020, integrate ecosystem and biodiversity values into national and local planning, development processes, poverty reduction strategies and accounts. The article’s core proposal—to assess nature-related financial risks for banks and companies—is a method for integrating ecosystem values into financial and economic accounting.

2. Under SDG 13 (Climate Action):

   • Target 13.1: Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries. The analysis of company exposure to floods and droughts and the role of ecosystem services (e.g., flood protection) in mitigating these hazards directly addresses the need to build resilience.
   • Target 13.2: Integrate climate change measures into national policies, strategies and planning. The article advocates for an “integrated risk assessment and management framework” that addresses the “climate-nature nexus,” aligning with the need for integrated policy-making.

3. Under SDG 8 (Decent Work and Economic Growth):

   • Target 8.4: Improve progressively, through 2030, global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation. The article’s central argument is that the euro area economy is highly coupled with environmental health, as “72% of… companies exhibit a high dependency on at least one ecosystem service,” and that this dependency creates significant financial risk.

4. Under SDG 6 (Clean Water and Sanitation):

   • Target 6.6: By 2020, protect and restore water-related ecosystems, including mountains, forests, wetlands, rivers, aquifers and lakes. The article highlights the critical dependency of the economy on “surface and ground water resources” and the risks posed by droughts, implicitly calling for the protection of the ecosystems that provide these services.

5. Under SDG 12 (Responsible Consumption and Production):

   • Target 12.6: Encourage companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle. The assessment of biodiversity footprints and financial dependency on nature serves as a foundational step for companies and banks to adopt more sustainable practices and report on nature-related risks.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the article mentions or implies several quantitative indicators that can be used to measure progress:

1. Indicators for SDG 15 (Life on Land):

   • Biodiversity Footprint: The article quantifies this as “the loss of more than 580 million hectares of pristine habitats globally.” This serves as a direct indicator for measuring the impact of economic activities on biodiversity loss (relevant to Target 15.5).
   • Mean Species Abundance (MSA): The article states that the GLOBIO model measures biodiversity intactness in MSA. MSA loss is used to calculate the biodiversity footprint, making it a key underlying indicator of ecosystem health.

2. Indicators for SDG 13 (Climate Action):

   • Climate Physical Risk Scores: The study uses standardized scores (0 to 1) for hazards like floods, droughts, and heat stress to assess the exposure of companies. These scores are a direct indicator of vulnerability to climate-related hazards (relevant to Target 13.1).
   • Greenhouse Gas (GHG) Emissions: The article identifies GHG emissions as a primary driver of the climate change component of the biodiversity footprint, making it an implied indicator for climate action.

3. Indicators for SDG 8 and SDG 12 (Economic Growth and Responsible Production):

   • Percentage of Companies/Loans Dependent on Ecosystem Services: The article provides specific figures: “72% of the analysed companies in the euro area exhibit a high dependency” and “75% of loans granted to EA companies… demonstrate a high level of dependence.” This measures the economy’s reliance on nature and its vulnerability to degradation.
   • Concentration of Financial Impact: The finding that “100 banks are responsible… for 87% of the total biodiversity footprint of the euro area banking system” is an indicator of how financial flows are concentrated in activities with high environmental impact.
   • Ecosystem Service Mismatch: The article measures the “mismatch between ES potential… and ES demand,” noting that “more than 60% of the loans are granted to companies located in areas where more than half of flood protection demand is unmet.” This is a specific indicator of ecosystem vulnerability and risk.

4. Table of SDGs, Targets, and Indicators

Source: nature.com