By Julie McCarthy: Chief Executive of NatureFinance.
Climate disasters were the most costly in 2024, the hottest recorded year, tallying over $229 billion. The number of countries unaffected by extreme weather phenomena is dwindling. Deadly floods in China, Germany, and Kenya, extreme heatwaves in India, prolonged droughts in Brazil, and large-scale wildfires in the United States and Ghana underscore the increasingly severe consequences of nature degradation and climate change on economies and societies.
The global economy relies on a stable climate and dependable ecosystem services, including fresh water supply, clean air, erosion and flood control, pollination, climate regulation, and carbon sequestration. According to the European Central Bank, nearly 75% of all bank loans in the Eurozone are granted to companies that heavily depend on at least one of these environmental services.
The economic implications of this dependency are profound. In the United Kingdom, environmental degradation could shrink GDP by 12%—worse than the hit from COVID-19—if not addressed. A risk analysis of nature-related risks in Hungary revealed that, without sufficient mitigation strategies, severe drought could double the volume of non-performing loans, increase sovereign debt, and diminish economic output by 4-7% in a single year. An analysis by the World Bank of 20 emerging markets found that, on average, 55% of bank loans are exposed to activities that rely heavily on at least one ecosystem service. It is clear that a stable financial system is heavily reliant on nature, which is in an increasingly precarious state.
Although central banks are increasingly aware of these risks, companies and financial institutions are neither required nor incentivized to invest in nature protection. In fact, nearly $7 trillion annually in public and private financing supports activities that harm forests, pollute water sources, and destroy biodiversity—35 times more than investment in positive nature initiatives.
Central banks and financial regulators are well-positioned to change this trajectory and outline a new plan towards a more resilient global economy. These authorities must begin to adjust risk assessments and transition plans to align with the new climate reality, utilizing their ability to influence the financial system through monetary policy and regulation. Importantly, as noted by European Central Bank Executive Board member Frank Elderson, preventing macroeconomic instability necessitates that central banks and regulators consider climate and nature risks together. Science increasingly shows that failing to do so will exacerbate food insecurity, forced displacement, and overlapping shocks.
These findings are already a daily reality in many parts of the world. In 2024, global cocoa prices reached an all-time high, attributed in part to adverse weather conditions in Ghana, the world’s second-largest producer. With agriculture becoming harder to sustain, many farmers in Ghana are selling their lands to informal miners (Galamsey) or becoming illegal miners themselves, further eroding local ecosystems.
A recent report from NatureFinance (of which I serve as CEO), the European Central Bank, the Potsdam Institute for Climate Impact Research, and the University of Minnesota indicated that focusing solely on climate policies increases economic and environmental risks. For instance, widespread carbon sequestration measures, such as monoculture tree planting projects, can significantly reduce biodiversity. The loss of pollinators may later impact crop yields, undermining the long-term sustainability of global food production for farmers and consumers. Ultimately, this means that well-meaning but short-sighted policies to reduce carbon emissions could inadvertently undermine biodiversity and worsen the climate crisis instead of alleviating it.
On the other hand, integrating climate and nature policies can help stabilize the agricultural sector, reduce biodiversity loss, and limit rising temperatures. While this is not a silver bullet, such an approach would significantly contribute to breaking the vicious cycle of nature loss and accelerating climate impacts.
Unfortunately, growing evidence of how nature degradation and climate change relate to price stability and the financial system contradicts the prevailing political spirit. Donald Trump’s return to the White House has intensified backlash against environmental, social, and governance (ESG) governance efforts in the United States and Europe. The U.S. Federal Reserve recently withdrew its membership from the “Network for Greening the Financial System,” a coalition of over 100 central banks and regulators working on improving climate risk management in the financial sector. Before Trump’s inauguration, major commercial banks and asset managers withdrew from climate action networks, while Texas and other states initiated lawsuits against prominent fund managers, alleging that they conspired against coal markets by integrating environmental risks into their investment strategies.
The rise of climate change denial on both sides of the Atlantic has led to halting ambitious actions aimed at shielding the financial system from nature- and climate-related shocks for the time being. However, central banks and regulators still possess powerful tools at their disposal to prevent the devastating consequences of environmental upheavals. They can require commercial banks and insurance companies to assess, report, and stress-test their financial portfolios for exposure to nature- and climate-related risks. They can impose limits on investment exposure to assets or sectors particularly vulnerable to such risks. They can provide preferential treatment for more resilient, adaptable green assets and sectoral strategies within their collateral frameworks and targeted refinancing operations.
Even when business, finance, and political leaders willfully ignore the overwhelming scientific and economic consensus in their decisions, central banks can steer us toward an economy that is more protected from the escalating shocks of the nature and climate crises. All they need to do is fulfill their mandate for financial stability.
