Integrating nature and climate risk scenarios for the financial sector

Until now, financial risk assessments have focused mainly on climate risks, often neglecting the impact of nature degradation. In the “Climate-Nature Risk Scenarios” project, researchers from NatureFinance, PIK, ECB and the University of Minnesota have developed a set of four scenarios that explore how climate and nature risks can be integrated, with the aim of mitigating potential risks arising from the further degradation of both.

The results of the pilot project show that scenarios which efficiently use resources and minimises environmental harm offer the best long-term agro-economic stability and sustainability. In contrast, scenarios focusing only on climate risks could lead to significant biodiversity loss and economic instability, particularly in agriculture. The study emphasises the importance of biodiversity, soil health, and pollination for the financial sector, and introduces economic risk indicators to show how policy ambitions impact land use and macroeconomic factors like food prices.

By combining macroeconomic and biophysical models, the modelling framework integrates climate and nature policies into a single risk-modelling approach, offering valuable insights into the economic and biophysical risks affecting the agriculture and land use sector globally from 2020 to 2050. Within the framework, the researchers assessed the degradation of ecosystem services, focusing on three key indicators: a decline in pollinators, increased soil erosion and the state of biodiversity.

The report stresses the need for nature-related stress tests and encourages future research to refine integrated risk modelling. The ECB plans to use the framework in future assessments. An online event will be held on 28 November to discuss the findings.