Living in a World of Disappearing Nature: Physical Risk and the Implications for Financial Stability

54 Pages Posted: 14 Nov 2023

See all articles by Simone Boldrini

Simone Boldrini

European Central Bank (ECB)

Andrej Ceglar

European Central Bank (ECB)

Chiara Lelli

European Central Bank (ECB)

Laura Parisi

European Central Bank (ECB)

Irene Heemskerk

European Central Bank (ECB)

Date Written: November, 2023

Abstract

The loss of biodiversity and the degradation of natural ecosystems pose a significant threat to the broader economy and financial stability that central banks and financial supervisors cannot ignore. To gain further insights into the implications of nature and ecosystem service degradation for financial stability, this study assesses the dependencies of euro area non-financial corporations and banks on different ecosystem services. The study then develops a method to capture banks’ credit portfolio sensitivity to possible future changes in the provision of ecosystem services. Our results show that 75% of all corporate loan exposures in the euro area have a strong dependency on at least one ecosystem service. We also find that loan portfolios may be significantly affected if nature degradation continues its current trend, with greater vulnerabilities concentrated in certain regions and economic sectors.

Keywords: biodiversity loss, economy, ENCORE, impact, input-output table, materiality score, nature degradation, nexus

JEL Classification: C55, G21, G38, Q5

Suggested Citation

Boldrini, Simone and Ceglar, Andrej and Lelli, Chiara and Parisi, Laura and Heemskerk, Irene, Living in a World of Disappearing Nature: Physical Risk and the Implications for Financial Stability (November, 2023). ECB Occasional Paper No. 2023/333, Available at SSRN: https://ssrn.com/abstract=4630721 or http://dx.doi.org/10.2139/ssrn.4630721

Simone Boldrini (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andrej Ceglar

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Chiara Lelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Laura Parisi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Irene Heemskerk

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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