The Risks of Nature Are Essentially Financial Risks
Julie McCarthy: CEO of NatureFinance
Patrick Odier: Head of Building Bridges and Chair of the Lombard Odier Group
New York – On December 26, 2004, a massive earthquake beneath the sea triggered a tsunami that killed 230,000 people across Southeast Asia, catching almost everyone, humans and animals alike, off guard, with one notable exception: elephants. In places like Thailand and Sri Lanka, elephants became agitated and restless hours before the waves arrived. Wild elephants fled to higher ground, while captive elephants defied their trainers, sometimes still carrying tourists on their backs. Elephants can sense low-frequency vibrations that most species cannot distinguish, and thus they responded to the early warning signals—ensuring their survival with much greater likelihood.
Today, a far larger disaster is brewing, as rapid global warming and escalating environmental degradation threaten every sector of the global economy. While a significant number of investors continue with business as usual, seemingly oblivious to the impending challenges, one group is striving to sidestep the harm: long-term asset owners, such as pension funds and sovereign wealth managers.
These investors, unlike hedge funds or private equity firms, adopt a generational perspective regarding the assets they manage. They cannot afford to ignore the inextricable link between global financial stability and environmental stability, a consciousness reflected in new initiatives like the Debt Suspension Coalition and the Global Development Debt Swap Hub. While some observers claim that factoring climate change into the equation constitutes a “distortion of missions” for global financial entities like the International Monetary Fund, leading investors recognize that nature and climate-related risks will manifest in shocks in both the near and medium term, impacting every aspect of the global economy.
Thus, even as many shareholders and CEOs remain focused on quarterly results, long-term asset owners are scrutinizing companies for natural capital risks, aiming to anticipate environmental shocks that may diminish the value of their assets in the long run. Currently, the Norwegian Government Pension Fund Global, which manages assets worth $1.7 trillion, is evaluating 96% of its portfolio for such risks. This is not merely an internal revision of environmental, social, and governance (ESG) commitments; it signifies a major institutional shift.
Norway is not alone. Recently, the Finnish government pension fund began exploring ways to quantitatively assess the financial risks associated with nature in light of long-term pension obligations. Likewise, Singapore’s Temasek Holdings has started using satellite monitoring data and biodiversity data to assess risks and opportunities related to natural capital.
At a time when environmental, social, and corporate governance frameworks have become focal points in political and cultural battles, it is clear that these actions are not driven by political pressures or social trends but by pragmatic sensibility—a growing awareness of urgent necessity. Indeed, extreme weather events, biodiversity loss, water stress, and resource scarcity are disrupting economies, with low-income countries most severely affected.
In 2022, floods in Pakistan devastated the agriculture sector—employing 40% of the workforce—leading to food price spikes and pushing the country to the brink of default. In Indonesia, deforestation and the degradation of peatlands due to unsustainable palm oil production resulted in a temporary export ban in 2022. In Brazil and Ethiopia, rising temperatures and erratic rainfall have drastically reduced coffee yields in recent years, causing global prices to soar and adversely impacting rural incomes and export revenues.
High-income countries are not immune to these risks. In the United States, prolonged droughts are reducing crop yields from Arkansas to Oklahoma, forcing farmers to drill deeper wells and switch to less profitable crops. Meanwhile, climate-related disasters, such as hurricanes and wildfires, are causing home insurance companies to raise premiums, reduce coverage, or even withdraw from high-risk areas. In Europe, nature-related risks have affected olive oil production in Italy and Greece; wine grapes in France, Italy, and Spain; timber supplies in Central and Northern Europe; and fisheries in the Mediterranean; as well as transportation on the Rhine and Danube rivers. This doesn’t even begin to cover the immense human costs associated with natural and climate crises, which manifest in places like Valencia and Texas.
However, such risks have not sufficiently reflected in prices according to financial models. This is partly due to the fact that data linked to natural capital, unlike data connected to greenhouse gas emissions, remains fragmented, inconsistent, and difficult to access. The risks are complex and systemic—intersecting water scarcity, biodiversity loss, and climate change across sectors and borders, causing cascading effects—and there are no standards for measurement or reporting. Consequently, most banks lack the information they need, particularly location-specific data, to assess the environmental consequences shouldered by borrowers.
Yet, new tools are beginning to emerge that could help bridge these gaps. For instance, the online tool Exploring Natural Capital Opportunities, Risks, and Exposure assists financial institutions in identifying nature-related risks they face through lending, underwriting, and investment in high-risk industries.
Moreover, the Taskforce on Nature-related Financial Disclosures has developed a set of disclosure recommendations and guidelines aimed at assisting businesses and financial institutions in integrating nature into their decision-making processes. Some central banks have developed integrated scenario models to assess the impact of nature- and climate-related risks on the economy and financial system. When combined with new biological data technologies, the necessary means for action are already in place. Investors need not drift aimlessly.
The issue is no longer one of awareness. With investors already facing the financial ramifications of environmental instability—from stranded agricultural assets to declining sovereign credit ratings in economies vulnerable to climate-related risks—there is no longer any doubt that the risks of nature are indeed financial risks. The onus now falls on asset owners, central banks, and institutions like the International Monetary Fund to incorporate this realization into all their activities—before the next preventable shock occurs. The institutions that take the lead will be those willing to step out of their silos, align capital with planetary boundaries, and invest not only in markets but also in the systems that support them.
