Understanding nature-related risks
As with climate, nature degradation presents both physical and transition risks that can significantly affect the performance of investment portfolios. Physical risks arise from the direct impacts of biodiversity degradation, such as the destruction of natural resources, which can disrupt supply chains and manufacturing processes. These disruptions can lead to lower revenues and increased costs for companies.
For example, industries such as nuclear energy and agriculture, which rely on large-scale water use, may face operational risks as water availability becomes increasingly limited. The agricultural sector also may be affected by reduced land suitability for crop cultivation and decline in pollinator populations.
Transition risks, on the other hand, stem from the shift towards more sustainable business models driven by consumer preferences, evolving regulations, and market forces. For example, the introduction of taxes on plastic packaging in several countries, including the UK, is encouraging companies to adapt their business models to explore alternative materials and increase recyclability. Additionally, the legal risks related to the use of harmful chemicals, such as perfluoroalkyl and polyfluoroalkyl substances (“PFAS”), demonstrate how nature-related regulations can affect business practices and investment performance.
Nature as a financial issue
Nature is vital not only for ecological health but also for economic stability. The European Central Bank estimates that nearly 75% of all bank loan recipients in the Eurozone depend on at least one ecosystem service. As biodiversity continues to decline, businesses, investors, and economies face mounting risks that could significantly affect financial systems globally. The loss of biodiversity can lead to direct financial losses, but it also creates opportunities for those who proactively address these risks. Companies that effectively mitigate these risks will have a competitive advantage.
Incorporating nature into investment decisions is also critical for achieving net-zero climate targets. Natural climate solutions, such as reforestation and ecosystem restoration, could contribute to one-third of the emissions reductions required by 2030 (Global Commission on Adaptation, 2019). These solutions not only mitigate climate change but also build resilience against future risks, offering substantial economic opportunities for investors who prioritise sustainability. Companies that have a proactive approach to nature can be attractive opportunities for investors.
The way forward
Increasingly, stakeholders are attempting to define the path forward for addressing nature. The Taskforce on Nature-related Disclosures (“TNFD”) and the EU’s Corporate Sustainability Reporting Directive (“CSRD”) are providing frameworks to address nature-related risks.
As these approaches are solidified, financial institutions are beginning to engage with clients to assess their portfolios' exposure to nature-related risks and dependencies. A growing number of financial institutions have committed to monitoring the impact of nature on their investments, with over EUR 23 trillion in combined assets now subject to nature risk assessments s (UNEP Finance Initiative, 2021).
We are well-positioned to assist companies and funds in setting nature strategies, identifying risks, and creating transition plans. By integrating nature-related risks into their investment processes, investors can not only safeguard their portfolios but also unlock significant opportunities for growth and resilience in a rapidly changing world.
Download the 2025 Sustainable Trends Outlook report
Explore the key trends driving sustainability. Download our 2025 Sustainable Trends Outlook report to stay informed on market developments.
