Handbook for
Nature-related
Financial Risks
Key concepts and aframework for
identification

Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

The University of Cambridge Institutefor Sustainability Leadership
The University of Cambridge Institute for Sustainability Leadership (CISL) is a
globally influential Institute developing leadership and solutions for a sustainableeconomy. We believe the economy can be ‘rewired’, through focusedcollaboration between business, government and finance institutions, to deliver
positive outcomes for people and environment. For over three decades we havebuilt the leadership capacity and capabilities of individuals and organisations, andcreated industry-leading collaborations, to catalyse change and accelerate thepath to a sustainable economy. Our interdisciplinary research engagement builds
the evidence base for practical action.

The Centre for Sustainable FinanceThrough a unique combination of deep industry collaboration, high-calibre research,and exceptional education programmes, the Centre for Sustainable Finance helps
financial institutions to play a leading role in building a more sustainableeconomy. This is achieved by convening groups of leading firms across banking,insurance and investment, to develop tools that address industry barriers andknowledge gaps, setting ambitious examples of best practice for wider financeindustry and equipping financial institutions to understand and improve theirsustainability impact.

The Investment Leaders Group (ILG) is a global network of pension funds, insurers andasset managers, with over £15 trillion under management and advice. The ILG's vision
is an investment chain in which economic, social and environmental sustainability aredelivered as an outcome of the investment process as investors go about generating
robust, long-term returns. It is convened by CISL.

The Banking Environment Initiative (BEI) is a group of global banks committed topioneering actionable pathways towards a sustainable economy. The BEI co-produces
horizon scanning applied research, develops leadership tools and convenes academic
and industry collaborations. It is a member-led, not-for-profit group convened by CISL
and initiated in 2010 with the support of HRH the Prince of Wales.

1Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Authors
The authors of the handbook were Grant Rudgley and Dr Nina Seega at the CISL
Centre for Sustainable Finance. They were supported at CISL by Annabel Ross,
Lucy Auden and Dr Cath Tayleur.

Acknowledgements
Significant intellectual debt is owed to the work of the Network for Greening the
Financial System and the De Nederlandsche Bank, as well as to Dr Anthony
Waldron and Dr Matthew Agarwala from our academic review group, whose
guidance and wisdom were invaluable.
The authors would also like to sincerely thank those individuals from financial
institutions in CISL’s Investment Leaders Group and Banking Environment Initiative
who supported the development of this handbook, user tested the framework
and provided valuable inputs: Dr Alex Kusen (Deutsche Bank), Alexandra
Basirov (BNP Paribas), Danielle Brassel (Zurich), Fiona Goulding (NatWest
Group), Gaurav Ganguly (HSBC Group), Lucian Peppelenbos (Robeco), Marek
Piskorz (Lloyds Banking Group), Markus Müller (Deutsche Bank), Özgür Göker(UBP), Rhona Turnbull (NatWest Group), Rupert Welchman (UBP), Simon
Connell (Standard Chartered), Tapan Datta (AON), Tim Manuel (AON), Will
Wollerton (Lloyds Banking Group), Xavier Desmadryl (HSBC GAM).

Citing this handbook
University of Cambridge Institute for Sustainability Leadership (CISL, 2021).
Handbook for nature-related financial risks: key concepts and a framework for
identification.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Contents
EXECUTIVE SUMMARY................................................................................................................. 4
HOW NATURE LOSS IS A RISK TO FINANCIAL INSTITUTIONS ......................................................... 5
WHY NATURE LOSS IS A FINANCIAL RISK ........................................................................................................ 9
Transmission channels for nature-related financial risks ............................................................. 10
Types of transmission channel ...................................................................................................... 10
Feedback is possible: transmission channels can flow in both directions..................................... 13
FRAMEWORK FOR IDENTIFYING NATURE-RELATED FINANCIAL RISKS ......................................... 15
USING THE FRAMEWORK ......................................................................................................................... 17
FIRST- AND SECOND-ORDER EFFECTS AND SYSTEMIC RISKS .............................................................................. 17
Risk cascades ................................................................................................................................. 17
DEFINITIONS OF RISK TYPES IN THE FRAMEWORK ...................................................................... 18
PHYSICAL RISKS...................................................................................................................................... 18
Ecosystem services: definitions and examples of what drives their decline ................................. 18
Measuring the health of ecosystem services ................................................................................ 22
TRANSITION RISKS .................................................................................................................................. 23
Policy and regulation..................................................................................................................... 23
Technology .................................................................................................................................... 24
Business model innovation............................................................................................................ 24
Consumer or investment sentiment .............................................................................................. 24
LIABILITY RISKS ...................................................................................................................................... 25
NATURE-RELATED FINANCIAL RISKS ............................................................................................................ 25
Credit risk ...................................................................................................................................... 25
Market risk .................................................................................................................................... 26
Liquidity risk .................................................................................................................................. 26
Business risk .................................................................................................................................. 27
NEXT STEPS ............................................................................................................................... 27

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Executive Summary
Our economy depends on the services that nature provides. Yet despite these services being worth
more than USD $100 trillion per year, nature is in decline.1 Twenty-three per cent of land is now
degraded and ocean ‘dead zones’ span an area greater in size than the United Kingdom.2
As nature declines, businesses, households and financial institutions are put at risk. To translate ourtrillions of dollars of dependence on nature into identification of specific risks posed by nature loss tofinancial institutions, the Cambridge Institute for Sustainability Leadership (CISL) has created thishandbook and a framework for the identification of nature-related financial risks.
This handbook builds on the Dasgupta Review of the economics of biodiversity, enabling financial
institutions to begin embedding nature into mainstream financial models, risk frameworks andportfolio strategies. It was co-created by banks, asset managers, CISL’s Centre for Sustainable
Finance and academics from the University of Cambridge conservation cluster. i During 2021, thisgroup will use it to identify and assess specific nature-related financial risks.ii
To make this handbook immediately useful to practitioners we:
1. Define key concepts
2. Detail transmission channels that make nature loss a financial risk
3. Outline a framework that banks and asset managers can use to identify nature-related
financial risks
The main audience for this handbook are financial practitioners with limited prior knowledge of
biodiversity loss, land degradation or how the decline of nature can put their institution at financial
risk. The intent is that it serves as a reference guide for individuals to engage with these subjects
further and to use the framework presented to start identifying nature-related financial risks.
Much attention has been devoted to the interaction between climate change and nature loss. While
climate change is a substantial driver of nature loss and subsequent nature-related financial risks,
others, such as water pollution, also cause considerable financial risks. By understanding andmeasuring nature-related financial risks, in addition to climate risk, financial institutions move a step
closer to understanding how to manage these risks in their portfolio. Through that act ofmanagement, the value of nature can be recognised and a transition to a nature-positive economy
catalysed.
Note for readers: throughout this handbook hyperlinks are provided for key terms. By clicking these, the reader
can find the place in the document where the term is defined.

iCambridge, UK is home to the largest cluster of conservation organisations in the world.

ii This handbook represents the latest output from the CISL programme of work on nature-related financial risks, which began with a review of thefinancial materiality of biodiversity loss and land degradation.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

How nature loss is a risk to financial institutions
Human activity is driving the decline of nature. The financial risks of biodiversity loss and landdegradation begin with human activity that drives nature loss.iii
As nature declines:
1. Natural capital is damaged and put at risk;
2. This reduces nature’s capacity to provide ecosystem services, either temporarily or
permanently, on which companies depend;
3. These companies are recipients of finance and investment, sources of tax revenue and key
links in supply chains. Their vulnerability to an ecosystem service decline is therefore avulnerability to investors, lenders, insurers, governments, connected companies and, byextension, a source for potential financial instability. These are physical risks.
Parallel to physical risks, transition and liability risks emerge, such as policies to protect nature.
Despite their positive impact on nature, such policies can cause economic harm to some companies
and, in turn, those financial institutions (FIs) connected to them.
Physical, transition and liability risks can drive a reorientation of portfolios and economic activity. As
a result, financial flows could be redirected to boost the ecosystem services that provide benefits topeople and drive a transition to a nature-positive economy, as shown in the below Figure 1.

iii

The financial materiality of biodiversity loss and land degradation was covered earlier in our CISL programme of work on nature-related financial risks.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Figure 1: Connections between economic activity, nature and financial risk-

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Box 1: Definitions of sources of nature-related financial risks and a nature-positive economy
Physical risks:

Much of global economic enterprise depends on the good functioning of
natural systems, such as stability of climate and generation of raw materials.
Physical risks arise when these natural systems are compromised, due to theimpact of climatic (i.e. extremes of weather) or geologic (i.e. seismic) eventsor widespread changes in ecosystem equilibria, such as soil quality or marine
ecology.3 Physical risks can be event-driven or longer-term in nature.4 It is thedamage to ecosystem equilibria and resulting ecosystem service degradationthat is our focus. For example, deforestation could reduce local rainfall, raising
operating costs for numerous sectors.

Transition risks:

Regulatory or market efforts to address environmental harm can negatively
impact companies and lead to stranded assets – representing ‘transition
risks’.5 These can include abrupt or disorderly introduction of public policies,
technological changes, shifts in consumer or investor sentiment and disruptive
business model innovation.6 As such they “relate to [a] process ofadjustment”7 towards a nature-positive economy. For example, antideforestation legislation increases due diligence costs for buyers of soft
commodities that could be connected to deforestation.

Liability risks:

The risk associated with emerging legal cases related to nature loss, which
could arise if parties that suffer loss or damage from the effects ofenvironmental change seek compensation from those they hold responsible.8
These losses or damages can include “potential pay-outs, fines, legal andadministrative costs, insurance costs, financing costs, and reputational costs.”9
Fines for oil spills are a prominent example.

Nature-positive economy: An economy in which public and private sector actors through choice andincentive take action at scale to reduce and remove the drivers and pressures
fuelling the degradation of nature, actively improving the state of nature(natural capital) and the ecosystem services it provides.10

There are five direct drivers of nature loss:
•
•

•
•

•

Climate change, where a change in climate destabilises ecosystems
Invasive species, where animals or plants have been moved to places where they damage
existing ecosystems, e.g. Japanese knotweed
Land use change, such as cutting down a forest to make way for agriculture
Overexploitation of natural resources, where a resource is used up faster than it can be
replaced, e.g. overfishing
Pollution of air, land or waterLand degradation refers to how a combination of these drivers can negatively impact land-based
ecosystems.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Box 2: Definitions of nature loss and the benefits nature provides
Natural capital:

Stock of renewable and non-renewable resources (e.g. plants, animals, soils,
minerals, ecosystems) that combine to yield a flow of benefits to people, referred
to as ecosystem services.11

Ecosystem services: Benefits that people obtain from natural capital, such as air and water purification
services, crop pollination and the breaking down of waste. Biodiversity underpins
the flow of benefits. Ecosystem services are also known as ‘nature’s contributions
to people’.12
Biodiversity:

The variety of life on earth – from flatworms to forests. Biodiversity is acharacteristic of healthy natural capital assets. It underpins nature’s capacity togenerate flows of ecosystem services, such as how birds and animals pollinate ourcrops, worms are essential to soil fertility and intact forests prevent the spread of
diseases.13 The resilience of nature is directly related to the health and status ofbiodiversity.

Nature loss:

Decline of natural capital, ecosystem services and biodiversity.

The relationship between biodiversity, natural capital, ecosystem services and their benefits to society isshown in the below diagram from the Capitals Coalition.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Box 3: Direct drivers of nature lossiv
Climate change:

Change in climate attributed directly or indirectly to human activity. 14 Whenclimate conditions are destabilized, ecosystem services are disrupted andbiodiversity is lost. For example, 50 per cent of the corals in the Great Barrier Reef
have died since the 1990s.15

Invasive species:

Species whose introduction by humans threatens biodiversity. The species will not
be native and is described as invasive if it expands into and modifies theecosystem.16 For example, European starlings are estimated to cause USD 1 billionof damage per year to US agriculture.17

Land use change:

Change in the use or management of land by humans.18 This may lead to a change
in the quality or extent of natural habitat, which has knock-on effects forecosystem services. For example, the conversion of natural forests to agriculture
threatens local water supply: in the Amazon area, one-third of the rainfall iscreated by natural processes in the forest itself – rainfall that would be lost if theforest became degraded.19

Overexploitation of natural resources: Using natural resources or harvesting species from the wild at
rates faster than then they can recover. One example of overexploitation is
overfishing; between the 1950s and 1990s the amount of fish caught in the wild
quadrupled, putting major pressure on marine ecosystems. 20
Pollution:

Introduction of materials into the environment that harm nature.21 Pollution canbe of air, water and/or land. One example is how air pollution impacts cognitive
performance and human health, significantly reducing both the supply andproductivity of labour.22

Why nature loss is a financial risk
Nature loss becomes a financial risk when physical, transition and liability risk manifest, causing
negative impacts upon:
1. Companies and governments, to which FIs are exposed via loans, debt and/or equity holdings
and/or revenues from financial services;
2. Financial markets, including commodity and money markets, to which FIs have exposure
through investments or financial services (e.g. derivatives).
3. The operations or property of FIs, e.g. a lack of green space in cities can lead to fast waterrunoff causing flash flooding that damages FI property.23
These exposures lead to credit, market, liquidity and business risks – referred to as ‘Financial risks’ inthe below Figure 2.v

ivv

These Direct Drivers align with those of IPBES detailed here.
Underwriting risks are out of scope for this handbook.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Transmission channels for nature-related financial risks
The links between sources of nature-related financial risks and the financial system are called
transmission channels, a concept used to analyse how the real and financial economy areconnected.24

Figure 2: Transmission of nature-related risks to financial institutions

Types of transmission channel
De Nederlandsche Bank (DNB) identifies six types of economic impact that can be caused by naturerelated financial risks and then transmitted into the financial system.25 These are detailed in Figure 3.
To provide colour to the DNB categories, micro- and macro-economic impacts highlighted by the
Network for Greening the Financial System (NGFS)vi are also detailed.26

vi

The NGFS is a membership group of central banks and financial supervisors from around the world aimed at strengthening the response toenvironmental risks, such as nature loss. As of December 14th 2020, the NGFS consists of 83 members and 13 observers.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Figure 3: Transmission channels: from sources of nature-related financial risk to financial risk------- Transmission channels ------>

Micro (from NGFS)27

Businesses(including FIs)-

Property damage and business disruption-

Stranded assets and new capital
expenditure due to transition-

Changing demand and changing costs-

Legal liability (from failure to mitigate oradapt)-

Loss of income (from weather disruption
and health impacts, labour market
frictions)-

Property damage or restrictions increasing
costs and affecting valuations

Households

Source ofnaturerelated
financialrisks

Macro (from NGFS)29

Aggregate
impacts on
macroeconomy-

Capital depreciation and increased
investment-

Price shifts (from structural changes, supply
shocks)-

Productivity changes (from severe heat,
diversion of investment to mitigation andadaptation, higher risk aversion)-

Labour market frictions-

Socio-economic changes (from changing
consumption patterns, migration, conflict)-

Other impacts on international trade,government revenues, fiscal space, output,
interest rates and exchange rates

Categories(from DNB)28

Disruption ofactivities/value
chainsRaw materiality
price volatility

Pricingexternalities

Financialrisks

Stranded assets

Adjustment/
relocation ofactivities

Capitaldestruction

The six categories of transmission channel are defined below. They are economic impacts that can beacute and/or chronic:••

Acute impacts are event-driven, with consequences that are sudden and often large, thenrecede until the event happens again.
Chronic impacts gradually worsen, with consequences that are not anticipated to recede orrevert to their prior state.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

1. Disruption of activities or the value chain (acute)
Disruption could be due to:▪
Business interruption▪
Changing costs▪
Changing demand▪
Labour market frictions, which for a business would mean an increase in the amount of time
to hire suitable workers or the likelihood of losing those workers▪
Litigation, resulting in losses or damages▪
Productivity changes, e.g. severe heat, pandemic impacting workers▪
Property damage
These would add costs to doing business in the short-term e.g. transport route diverted
temporarily awaiting a landslide road clearance, potentially drawing on working capital andaccess to debt. Without access to either, the solvency of the business may be threatened,
increasing the probability of default. The increased demand for liquidity may also increaserefinancing risk.
2. Raw materiality price volatility (acute and chronic)
Refers to fluctuating commodity prices caused by disruptions at the beginning of supply chains,or systemic changes in the supply chain. For example, poor harvests due to extreme weather cancause price volatility, especially if stocks are low, as they were with grain in 2006.30
Commodity price risk is material: “commodity price swings are the second-largest driver of
earnings uncertainty at publicly-traded companies.”31 It is also especially relevant to banks
offering hedging and trade finance products.
3. Pricing externalities (chronic)
Pricing externalities means accounting for the economic, social and/or environmental impacts
arising from the activities of an entity.32 Companies and their stakeholders (investors andcustomers) often do not bear the cost of these impacts. Recognition of these impacts is set toincrease, via initiatives such as the upcoming Taskforce for Nature-related Financial Disclosures,
and any subsequent regulatory changes may mean business is charged for ‘externalities’, leading
to additional costs of doing business.vii Taxes on nitrogen fertiliser to reduce water pollution are
one example.33
Although pricing externalities may generate an increase in short-term costs if the price isabsorbed by the company, an increasing number of business leaders now view it as wise to takeaccount of externalities to future-proof the organization, reducing the risk of sudden unexpected
cost increases and driving operational efficiencies.34 For example, Colgate-Palmolive devised aninternal price for water as much as 2.5 times higher than the purchase price by accounting forservices currently provided by ecosystems (externalities), which in turn helped drive lower water
usage in production processes.35

vii

By supporting the disclosure of impacts and dependence on nature, the Taskforce for Nature-related Financial Disclosures could help catalyse thecreation of a vault of information about the relationship of a company to nature. Equipped with such information, governments are able to better
identify categories of negative impact, who is associated with them and who or how to charge for them.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

4. Stranded assets (acute and chronic)
Assets that “suffer from unanticipated or premature write-offs, downward revaluations or are
converted to liabilities [as a result of] a range of environment-related risks.”36 For example,
recent impairments in the oil and gas industry have been attributed to weakening demand linked
to emerging transition risks. A demand scenario consistent with Paris Climate Goals weakens theoutlook for oil and gas prices and was specifically cited by Repsol for the EUR 4.8 billion
impairment charge it took in 2019.37
Work on stranded assets has typically focused on fossil fuel industries, but the issue has muchwider scope.
5. Adjustment or relocation of activities (chronic)
In this transmission channel, as opposed to a temporary disruption, the consequences on
business operations are more long-term. Drivers of a decision to more permanently adjust or
relocate activities can include:
▪
▪
▪

▪

▪
▪

Changing costs / price shifts
Changing demand
Labour market frictions, where the inability to hire or retain appropriate workers forces
adjustment
Litigation, where the business model or operations shift indefinitely as a result of liability
risk manifesting
Productivity changes
Property damage, such as from an increase in the regularity or severity of extreme weather
eventsAdjustment or relocation of activities would involve capital expenditures in order to adapt, e.g.
international trade flows changing due to new anti-deforestation regulations. Higher capital
expenditures increase the financial risks associated with the business in the short- to mediumterm.
6. Capital destruction (acute)
Capital destruction, simply defined, happens when a physical risk manifests and damages assets,
e.g. if a landslide damages a railway.
The final step: from transmission channel to financial institutions
Each transmission channel identified can lead to the impairment of assets or collateral and/or lower
corporate profitability.38 These impairments or impacts on profitability, actual or anticipated,establish a connection to financial institutions and create financial risks.

Feedback is possible: transmission channels can flow in both directions
As awareness of the ‘nature-related financial risks’ improves, feedback is possible, first to theeconomy and then to the environment. In other words, transmission channels can flow in both
directions: from the real to the financial economy and from the financial economy back to the real
economy. For example:

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification•

If the credit rating of a sector exposed to nature-related risk is lowered, then this may
promote behaviour in the real economy that further damages nature. In the case of
agriculture clients, a lower rating and higher interest rates could deter investment inequipment that improves the productivity of degraded land, in turn increasing the likelihoodthat more land is deforested to meet growing food demand.viii

viii

It is critical that techniques to improve degraded land productivity do not simply reduce prices and thus enable greater consumption of agricultural
products, per Jevons paradox.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Framework for identifying nature-related
financial risks
Equipped with knowledge about the physical, transition and liability risks related to nature loss, andthe transmission channels that connect these risks with the financial world, it is possible to create aframework for identifying nature-related financial risks. Shown below, this framework begins withsources of nature-related financial risks (column A) and concludes with the financial risks (column D).
The transmission channels in between can be found in column C and mirror those described in theabove Figure 3.
When risks manifest as a result of nature loss, they can do so as a result of the decline of ecosystemservices or because of a response to that nature loss. Ten categories of ecosystem service decline
and responses to nature loss are specified (column B). These categories are defined in full by thenext chapter, as are the financial risks specified by column D.
Figure 4: Framework for identifying nature-related financial risks

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification)

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Using the framework
During usability testing of the framework, financial institutions recommended applying it to one
sector at a time, though the framework could also be applied to a specific geography (e.g.
country/region). This meant that the framework functioned as detailed above.
During 2021, CISL and financial institutions will use the framework to identify and assess specificnature-related financial risks. As progress is made, the framework may evolve to ensure accessibility
and usefulness.

First- and second-order effects and systemic risks
Identifying nature-related risks for the agriculture sector provides a good example of first-ordereffects, where the manifestation of the risks have a direct impact on a company.39
However, whilst it is “easy to draw a direct link between a risk and its impact on [a] business”40 it will
be more difficult to identify second-order effects. These effects have a “wider impact, beyond thefirst order effects, that influence another element in [the] industry or value chain, and thereby
change the economic balance of [the] industry.”41 For example, a tax on imports should directlyreduce demand for the affected goods, impacting the companies that produce them – a first ordereffect; yet this lower demand for imported goods could also impact associated sectors e.g. retail,logistics etc – a second order effect.
Lastly there is contagion risk, which can originate in the financial or real economy and is a systemicrisk that financial difficulties at one or more financial institutions spill over to the financial system as
a whole.42 One example is how the sub-prime mortgage crisis catalysed the global financial crisis of
2008-2009.

Risk cascades
In wild periods of alarm, one failure makes many, and the best way to prevent the derivative
failures is to arrest the primary failure which causes them.
― Walter Bagehot, Lombard Street
The chain of economic effects, from first- to second-order through to contagion, are a risk cascadesuch as Bagehot describes that can result in systemic risks to the economy as a whole. His words
allow us to conclude this section with a reference to where we began in Figure 1: namely; that
economic activity causes nature loss – the ‘primary failure’ – that causes a cascade of reactions andeconomic impacts to which investors and lenders are exposed.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Definitions of risk types in the framework
Physical risks
Physical risks can arise when ecosystem equilibria are damaged, causing ecosystem services on
which the economy depends to degrade (full definition).

Ecosystem services: definitions and examples of what drives their decline
The ecosystem services that are degraded by economic activity, causing financial risk, are divided
into five categories. This is a simplification of a classification by the Swiss Re Institute, noting that
others exist (see Appendix A). The purpose of creating five clear, simple categories is so the financial
community can begin to identify and distinguish between the sources of nature-related financial
risks.
Table 1: Ecosystem service categories
Five categories

Swiss Re Institute--

Air quality and local climate-

Water security-

Water quality-

Food provision
Timber provision-

Pollination
Soil fertility-

Habitat intactness-

Erosion control
Coastal protection

Air quality and local climate
E.g. the regulation of temperature, humidity andpollutants-

Water security
E.g. the availability of freshwater-

Food and other goods provision
E.g. pollination enabling agricultural output-

Habitat intactness
E.g. intact habitats reduce risk of disease-

Hazard regulation
E.g. mangroves that protect coastlines18

Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

1. Air quality and local climateix
Definition
The regulation of air quality and local climate.
Within the local climate, “vegetation can modify temperatures, humidity, and wind speeds… at
local and micro-levels.”43 For example, a lack of trees in urban areas increases the urban heatisland effect, increasing air conditioning costs.44
For air quality, a range of organisms and natural structures (e.g. peat or forests) filter and absorb
pollutants that could “directly affect human health or infrastructure.”45 Again, a lack of trees inurban areas reduces air quality.46
In passive house design, buildings are extremely airtight. This makes the conditions inside thebuilding more stable and predictable. Predictability means temperature can be controlled
without wasting energy (versus high energy consumption if the building leaks). A stableenvironment means less costly building management. Climate stability and good air quality
provide the same predictable operational environment from which all companies can benefit.
Consequences of air quality and local climate degrading
Examples of the consequences of air climate and local climate degrading, by driver, include:
Land use change•
One-third of water falling in Amazon comes from its own trees (trees take up rainwaterand give it back to the atmosphere, where it turns again to rain). If the forest is
degraded, this climate control collapses and the Amazon forest itself risks turning into asavannah, with substantial consequences for agriculture and water supplies across SouthAmerica and into North America. 47
Pollution•
Lower air quality due to particulate pollution reduces working productivity.48
Example of how this could manifest as a financial risk
Sovereign debt risk could increase if revenues from industries reliant on predictable rainfall, suchas agricultural export-based economies, are impacted.
2. Water security
Definition
The availability and quality of freshwater.
From beverage manufacturers, to utilities and consumer goods companies, the availability ofclean water is the lifeblood of the business.
ix

Global climate stability is critical for the health of all five of the services identified in Table 2.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Consequences of a decline of water security
Examples of the consequences of a decline in water security, by driver, include:
Land use change•
Deforestation can negatively affect water security as forests regulate water flows throughwet and dry seasons. This increases resilience of land to drought and consistency of watersupply, safeguarding drinking water and food supply. 20 million people in Mexico City get
their drinking water from mountain forests.49
Pollution•
Agricultural runoff, such as fertilisers, can pollute freshwater, raising water treatment
costs and posing risks to public health.50 This type of pollution is particularly relevant
when it occurs in mountain areas, since these provide 60-80 per cent of freshwatersupply.51
Example of how this could manifest as a financial risk
Reduced availability of water directly impacts the cost base of industries such as utilities andagriculture, increasing operational expenditures and cost of living. This could lead to additional
credit or market risk associated with the companies impacted, especially if significant
investment is needed to adjust operations.
3. Food and other goods provision
Definition
The provision of food and other goods, including materials and energy.52
This ecosystem service grows or otherwise creates soft and hard commodities, from which
tangible economic goods are derived.
Consequences of a decline of food and others good provision
Examples of the consequences of a decline in food and other goods provision, by driver, include:
Invasive species•
Introduction of foreign species disturbs fish hatcheries, e.g. Asian carp in the US Great
Lakes consume what native fish would have, crowding out native species andundermining an industry worth USD $7 billion.53
Land use change•
Removing mangroves removes habitats critical to the productivity of nearshore
fisheries.54•
Land management practices that compact soil, worsen water flow regulation and degrade
soil carbon ultimately reduce crop yields.55•
Reducing the genetic diversity of plant species farmed on land, such as rice, wheat andmaize, can reduce crop yields because there is less resilience to pests.56

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Key concepts and a framework for identification

Overexploitation of natural resources•
Fishery mismanagement reduces wild catch by up to $83 billion each year.57
Pollution•
Pesticide pollution can cause near-shore fishery collapse.58
Example of how this could manifest as a financial risk
Lower volumes from agricultural, forestry or fishery industries in certain locations could reducethe demand for associated services in the value chain, such as pulp and paper processing,increasing the credit and market risk of these companies.
4. Habitat intactness
Definition
Habitat intactness refers to the maintenance of conditions necessary for habitat dependent
species and ecosystem health. One way a habitat ceases to be intact is if connectivity is removed
and species are marooned in small pockets. For example, having a decent-sized block ofconnected forest to maintain the forest ecosystem.
Consequences of a loss of habitat intactness
Examples of the consequences of a loss of habitat intactness, by driver, include:
Climate change•
Twenty-five per cent of all marine species depend on healthy coral reefs.59 Changes in our
climate are warming oceans, killing the coral habitats. Current rates of warming arecompounding other pressures, such as overfishing, to the extent that 90 per cent of reefs are
threatened with extinction by 2030.60
Land use change•
Greater reliance on pesticides: pest control is weakened when land management does not
sufficiently acknowledge the value of habitat connectivity.61•
Loss of nursery habitats that support the provision other services, such as food; for example,
eelgrass beds provide a valuable refuge, foraging, and spawning habitat for many
commercially and recreationally fished species.62
Examples of how this could manifest as a financial risk
Less habitat intactness can concentrate species and increase the number of interfaces between
those species and humans. This increases the chance of zoonotic disease – where pathogens
transmit from animals to humans – such as Covid-19.63, x
Furthermore, the loss of species due to the loss of habitat intactness is irreversible, with suchextinction representing the loss of genetic material that may have held yet to be understood
medicinal or other future value.
x

There is clear overlap here with the other category of Hazard Regulation.

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5. Hazard regulation
Definition
Regulation of the impact of floods, fires, landslides, droughts, wind, storms, hurricanes, seawater
intrusion, tidal waves, heat waves, tsunamis, high noise levels and organisms detrimental tohumans.64
Much of the value of hazard regulation is only fully realized when it is lost. Reduced hazard
regulation can create a need for costly expenditures such as sea defences and tidal barriers, aswell as emergency government action such as mandatory evacuations and travel bans.
Consequences of a decline in hazard regulation
Examples of the consequences of a decline in hazard regulation, by driver, include:
Land use change
If soils are allowed to erode due to how the land is managed, flood risk can increase.65
Mangroves weaken wave energy, providing storm surge protection. If land use ischanged, and mangroves degraded, then flood damage costs could increase by $65 billion
annually.66
Invasive Species
Invasive species undermine the ability of an ecosystem to regulate organisms that can cause
damage to the economy, for example:
Invasive plants can severely damage lakefront property values by interfering withwaterfront recreation opportunities. In Vermont, this has negatively impacted property
values by 16 per cent.67
Invasive mollusc populations can negatively impact hydropower electricity production,
increasing the cost base of utilities.68
Example of how this could manifest as a financial risk
If the impact of hazards is not regulated, then infrastructure and real estate are put at greaterrisk of flood, storm, etc. and capital destruction can occur. That capital destruction poses credit
risk where assets are offered as security, and market risk as balance sheets are impacted.xi

Measuring the health of ecosystem services
What constitutes ecosystem health will vary by geography and context. What is more, the quality
and availability of data and tools to measure that health varies.
Examples of tools include the CISL Biodiversity Impact Metric, a risk-screening tool for those sourcing
goods in agricultural supply chains, the Integrated Biodiversity Assessment Tool, which contains dataxi

It also poses underwriting risk for the insurance industry, which is out of scope for this handbook.

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about threatened species, protected habitats and key global biodiversity sites, and the WBSCD Guide
to Corporate Ecosystem Valuation.xii
Yet this is an ongoing field of research and where gaps exist, methods continue to emerge. For
example:••Trase Finance is mapping the link between deforestation, finance and trade.
The Science Based Targets Network (SBTN) is working on creating targets for nature, which
will create a harmonised set of metrics for assessing and measuring nature loss caused bycompanies.69 The aim is for these targets to be developed by 2022.

Transition risks
Transition risks arise from efforts to address environmental change (full definition). These efforts
tend to manifest as changes to regulation and policy, technology, consumer or investor sentimentand business model innovation. As a rule, the more disorderly or abruptly these changes manifest
the greater the transition risk.

Policy and regulation
Policy refers to government legislation passed, whereas regulation can come from a semiautonomous regulatory body, including financial regulation.
Examples of public policy and regulation that are a source of nature-related transition risk include:•

Nitrogen reduction policies:
In order to meet nitrogen pollution reduction rules, licensing of new construction projects
was halted in the Netherlands in 2019. The extent to which any resultant cost fortransitioning nitrogen producing activities falls on public or private companies will influence
the extent of the financial risk.70•

Organic farming requirements:
The EU Biodiversity Strategy targets at least 25 per cent of agricultural land to be farmed
organically by 2030.71 This could impact revenues of some fertiliser companies, posing risks
to creditors and investors.

•

Extension of the ‘polluter pays’ principle:
The Alpine Convention, which includes the polluter pays principle, places an environmental
damage burden on business.72 The extension of the principle increases the liability risk facing
business and, by extension, their creditors or investors.

•

xii

Stricter ‘no biodiversity net loss’ legislation, e.g. wetland mitigation banking in the US.73

Other examples are covered in an earlier CISL publication on the Financial Materiality of Biodiversity and Land Degradation.

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Stricter regulation can increase the cost of doing business for some. Those without shadow
pricing, where the value of ecosystem services is accounted for, will see increased liabilities
that could increase refinancing and credit risk.
•

Requirement for property developments to factor in open space or a net biodiversity gain for
new developments.74
Those firms without the pedigree and institutional expertise to deliver will put their investors
at greater market risk, should such requirements be introduced.

Technology
Technological improvements or innovations that support the transition to a nature-positive economy
can have a significant impact on certain companies. For example, the development of leather andprotein alternatives as a substitute to deforestation-associated agricultural goods. To the extent thatnew technology displaces old systems and disrupts some parts of the existing economic system,
winners and losers emerge. There are financial risks of being exposed to the latter.
The timing of technology development and deployment, however, is a key uncertainty in assessing
technology risk.75

Business model innovation
New ways to organise and run a company can improve the profitability or balance sheet of thatcompany, without the use of new technology. For example, by organising and managing the
production of agricultural products at a ‘landscape’xiii level, a number of ecosystem services benefits
can accrue to farmers, such as improved water quality.76
As with technology risk, if business model innovation displaces old systems and disrupts some partsof the existing economic system, then winners and losers emerge, with greater financial risks
attached to the latter.

Consumer or investment sentiment
Changing consumer sentiment toward certain products or investor sentiment toward certain assets
can impact demand for both:77••

Investors are sensitive to environmental disasters. For example, of a sample of 64 explosions
in chemical plants and refineries between 1990-2005 petrochemical firms lost 1.3 per cent of
their market value in the two days following an explosion; furthermore, the greater theextent of chemical pollution from the event, the greater the size of the loss.78
Consumer demand for sustainability labels has led to unlabelled products losing market shareto ethical products. Between 2013 and 2018, 90 per cent of the fastest growing consumer
goods products in the US, by sales, were marketed as sustainable.79

xiii

A landscape is a fixed geographic area containing many producers. If managed according to the agreed upon standards a landscape can become what
IDH calls a ‘verified sourcing area’.

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Liability risks
Liability risks can impact companies or financial institutions and manifest as:
•
•

•

•

Pay-outs and fines.
Legal or administrative costs during litigation, for legal counsel and the associated back-office
work for the defence and, if ordered, for the claimant.
Insurance costs, for liability insurance products that may adjust their terms as nature-related
liability risks become more visible.
Reputational costs, where consumer or investor sentiment is impacted by litigation.80

Examples include:
•

•
•
•

Revocation of licences to develop land if the government deems the environmental and social
impact assessment inadequate, see the Bear Creek vs Peru case.81
Fines if a company cultivates land connected to illegal deforestation.82
Penalties relating to ballast water regulations that cover the introduction of alien species.83
Fines for deliberate ocean dumping or oil spills.84

These liabilities increase the credit and market risk associated with a company.
Liability risk is different to ‘policy and regulation’ transition risk. The latter is about the emergence of
new policy or regulation that, for example, requires an adaptation of business operations; whilst theformer is based on regulation that is in place and represents the risk that there is a failure in, to give
one example, company operating procedures.

Nature-related financial risks
Nature-related physical, transition and liability risks pose financial risks to financial institutions. The
transmission channels have been described above. They can manifest as credit, market, liquidity andbusiness risks, as defined below.xiv

Credit risk
Definition: Credit risk is “comprised of issuer and counterparty risk. Issuer risk is the possibility that
an issuer/borrower is not able to fulfil its obligations due to its default. Counterparty risk comprises
the risk that a counterparty defaults and is not able to fulfil its obligations.” 85
Examples:••Deforestation and land conversion for agriculture reduces flood control, which increases
counterparty risk by putting assets of clients at greater flood risk.86
Mangroves safeguard property values by offering wind protection; the wind protection value ofmangroves during storms in reducing house damage amounted to approximately US$177 perhectare.87 This is of value where property is used as counterparty risk collateral.

xiv Underwriting risks are out of scope for this handbook.

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Handbook for Nature-related Financial Risks
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Rating of European Chemical companies could be negatively impacted by EU proposal to reduce
fertiliser use by greater than 20 per cent by 2030. This could pose a material risk to sales for
those with significant European end market exposures.
If land is managed appropriately, it can can help prevent wildfires, protecting property values(collateral) in the case of a counterparty default.88

Market risk
Definition: the “risk of losses in on- and off-balance-sheet positions arising from movements in[financial] market prices.”89
Examples:
•

•

•

•

Uncertainty over the potential impact of an emerging zoonotic disease, such as Covid-19, cancause significant market losses.
Accidents with negative environmental effects can result in negative stock market reactions.
Following the Deepwater Horizon explosion in the Gulf of Mexico in 2010, the abnormal returnfor BP was -2.62 per cent, with an abnormal return of -3.38 per cent for Transocean, the ownerof the drilling rig.90 Other examples exist,91 such as how potash mining accidents negatively
impact the miner’s market value in the days that follow an accident.92
Breaking environmental regulations can limit access to capital markets. For example, the China
Securities Regulatory Commission has blocked companies from carrying out an initial public
offering if they have broken environmental protection laws.93
Almost USD $600 billion of annual crop values are at risk due to pollinator losses. 94 Insect
pollinators underpin agricultural yields, with 84 per cent of commercial grown crops insect
pollinated.95 Stressed pollinator populations pose a significant equity and debt market value risk
to the agriculture sector, but could also trigger second order effects that impact otherindustries. For example, if food prices significantly increase because of lower agricultural yields
then the percentage of household spending on non-essentials, such as consumer technologies,
could decrease, putting equity and debt market values of firms in those value chains at risk.

Liquidity risk
Definition: the risk that an institution “will not be able to meet efficiently both expected andunexpected current and future cash flow and collateral needs without affecting either daily
operations or the financial condition of the firm.”96
Examples:••Soft commodity market volatility can be caused by difficult to predict harvest volumes. For
example, in the first five months of 2018 cocoa prices increased by more than 50 per cent,mainly because the 2017/2018 harvest was not anticipated to be as strong as 2016/2017. 97 If a
biodiversity tipping point, such as rainfall cycle disruptions in the Amazon, cause agricultural
output to fall dramatically this could significantly reduce liquidity in soft commodity markets,
putting trading positions at risk.98
Pressure to liquidate assets due to a biodiversity tipping point emerging may undermine thefinancial condition of FIs, potentially triggering wider systemic risks.
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Handbook for Nature-related Financial Risks
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Cost of debt refinancing if client’s licence to operate is temporarily withdrawn due toenvironmental damage or non-compliance with environmental regulations.

Business risk
Definition: Those risks that a financial institution’s operations, plans or business model face as aresult of a change in circumstances. 99 This can include the reputational risk to revenues of being
connected, as a financier or investor, with biodiversity loss.
Examples:
•

•

•

•

Dams and irrigation, which are examples of land use change, have increased the prevalence ofmalaria and encephalitis, potentially impacting employee sickness rates and labour
productivity.100
Being connected to major negative environmental events, such as oil spills or deforestation, may
lead to action by creditors or investors such as the withdrawal of deposits or deterioration ofshare value.101
Policy or regulatory changes to protect nature, such as the Lacey Act, which since 2008 hasbanned US imports of illegally sourced lumber and timber products, create an additional risk
exposure and operational overhead for FIs that could impact the commercial viability of somebusiness lines.
Financial institutions without sufficient ESG policies, including on nature loss, risk investor
action.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

Next steps
The Dasgupta Review of the economics of biodiversity focuses on completely rewiring mainstream
economic and financial models. This handbook aims to advance that rewiring process. By defining
key concepts and putting forward a framework for identifying nature-related sources of financial risk,
we aim to enable financial institutions to begin to embed nature in their operations, risk frameworks
and portfolio strategies. Once embedded, and the logic of financial decision making rewired, muchneeded private capital can be mobilised toward nature-based solutions and a transition to a naturepositive economy catalysed.
During 2021, CISL’s Centre for Sustainable Finance will continue their collaboration with academics
and members of the Banking Environment Initiative and Investment Leadership Group, applying theframework to assess specific instances of nature-related financial risk (creating use cases).
Assessing these risks brings the financial materiality of nature loss into sharp focus, making acompelling business case for financial institutions to engage with risk mitigation strategies that
protect and restore nature, whilst creating opportunities to design new investment, hedging andinsurance products that drive change in the real economy for a nature-positive future.

Call to action
We call on the financial community to use this handbook to start identifying nature-related financial
risks. The sooner we begin the journey to embedding nature into financial decision making, thesooner we rewire our economy to protect and restore our natural world.

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Appendix A
Table 2: How the five categories of ecosystem services match up with other classifications xv
Five categories

Swiss Re Institute--

Air quality and local
climateAir quality and local
climateENCORE

IPBES

-

-

Regulation of air quality
Regulation of climate-

Pollination and dispersal of
seeds
Regulation of ocean
acidification
Formation, protection anddecontamination of soils
EnergyFood and feed
Materials and assistance
Medicinal, biochemical andgenetic resources

Ventilation
Climate regulation
Filtration-

Food and othergoods provision-

Food provision
Timber provision
Pollination
Soil fertility-

Fibres and othermaterials
Soil quality
Genetic materials--

Habitat intactness-

Habitat intactness-

Maintain nursery
habitats
Genetic materials

-

-

-

Hazard regulation-

Erosion control
Coastal protection

-

-

xv

Water security-

Water security
Water quality-

Buffering andattenuation of massflows
Mass stabilisation anderosion control
Flood and storm
protection
Disease control
Mediation of sensory
impacts
Ground water
Surface water
Water quality
Filtration
Water flow maintenance
Bio-remediation

-

-

-

Habitat creation andmaintenance
Learning and inspiration
Physical and psychologicalexperiences
Supporting identities
Maintenance of options

Regulation of hazards andextreme events
Formation, protection anddecontamination of soils
Regulation of organisms
detrimental to humans

Regulation of freshwater
quantity, location andtimingRegulation of freshwaterand coastal water quality

The groupings of the services specified by the Swiss Re Institute, ENCORE and IPBES are intended to be indicative only.

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References
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Costanza, Robert; de Groot, Rudolf; Sutton, Paul; van der Ploeg, Sander; Anderson, Sharolyn J; Kubiszewski, Ida; Farber, Stephen; Turner, R. Kerry.
(2014). Changes in the global value of ecosystem services. Global Environmental Change. 26. Retrieved from:https://doi.org/10.1016/j.gloenvcha.2014.04.002
2 United Nations (UN). (2019, May). Nature’s Dangerous Decline ‘Unprecedented; Species Extinction Rates Accelerating. Retrieved from:https://www.un.org/sustainabledevelopment/blog/2019/05/nature-decline-unprecedented-report/
3 Cambridge Institute for Sustainable Finance (CISL). (2016). Environmental risk analysis by financial institutions: a review of global practice. Cambridge:
Cambridge Institute for Sustainable Finance (CISL). p.iv. Retrieved from: https://www.cisl.cam.ac.uk/resources/publication-pdfs/environmental-riskanalysis.pdf
4 ibid5 Building on: ibid
6 ibid7 Network for Greening the Financial System (NGFS). (2020, September). Overview of Environmental Risk Analysis by Financial Institutions: p.45.
Retrieved from: https://www.ngfs.net/sites/default/files/medias/documents/overview_of_environmental_risk_analysis_by_financial_institutions.pdf
8Adapted from Carney (2015) and NGFS (2019), as expressed in: Solana, Javier. (2020, October). Climate change litigation as financial risk. Aims Press
Green Finance. 2 (4): Retrieved from: http://eprints.gla.ac.uk/225765/1/225765.pdf
9 ibid: p.344
10 Forthcoming: Cambridge Institute for Sustainability Leadership (CISL). Business and Nature report. Cambridge: CISL.
11 Definition of natural capital from: Capitals Coalition. The Capitals Approach. Retrieved from: https://capitalscoalition.org/capitals-approach/
12 Ecosystem services are still used to classify “the benefits people obtain from ecosystems”. However, they are today superseded in theIntergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) assessments by “nature’s contributions to people” (NCP).
See: IPBES. Nature’s contributions to people. Retrieved from: https://ipbes.net/glossary/natures-contributions-people
13Cambridge Institute for Sustainable Finance (CISL). (2020, April). Measuring business impacts on nature: A framework to support better stewardshipof biodiversity in global supply chains. Cambridge: Cambridge Institute for Sustainable Finance (CISL): p.4. Retrieved from:http://www.cisl.cam.ac.uk/resources/natural-resource-security-publications/measuring-business-impacts-onnaturehttps://www.cisl.cam.ac.uk/resources/publication-pdfs/measuring-business-impacts-on-nature.pdf
14United Nations Framework Convention on Climate Change. Articles 1: Definitions. Retrieved from:https://unfccc.int/resource/ccsites/zimbab/conven/text/art01.htm#:~:text=%22Climate%20change%22%20means%20a%20change,3
15 Visser, Nick. (2020, October). Half of Corals on the great barrier reef have died since 1990s, study finds. HuffPost US. Retrieved from:https://www.huffingtonpost.co.uk/entry/great-barrier-reef-half-corals_n_5f852e6ac5b6e5c32002f52e?ri18n=true
16 Adapted from: IPBES. Invasive alien species. Retrieved from: https://ipbes.net/glossary/invasive-alien-species
17 Homan, H. Jeffrey; Johnson, Ron J.; Thiele, James R.; Linz, George M.. (2017, September). European Starlings. Wildlife Damage Management
Technical Series. 13. Retrieved From: https://core.ac.uk/download/pdf/188116515.pdf
18 Adapted from: IPCC Data Distribution Centre. Glossary: Land use and land use change. Intergovernmental Panel on Climate Change (IPCC). Retrieved
from: https://www.ipcc-data.org/guidelines/pages/glossary/glossary_lm.html
19 Staal, A., Tuinenburg, O.A., Bosmans, J.H.C. et al. (2018). Forest-rainfall cascades buffer against drought across the Amazon. Nature Climate
Change 8, 539–543. Retrieved from: https://www.nature.com/articles/s41558-018-0177-y
20 Convention on Biological Diversity (CBD). (2010). Global Biodiversity Outlook 3. Retrieved from: https://www.cbd.int/gbo3/?pub=6667&section=6711
21 Adapted from: National Geographic. Resource Library: Encyclopaedic Entry: Pollution. Retrieved from:https://www.nationalgeographic.org/encyclopedia/pollution/
22 Chang, Tom Y.; Zivin, Joshua Graff; Gross. Tal; Neidell, Matthew. (2019). The effect of pollution on worker productivity: Evidence from call centre
workers in China. American Economic Journal: Applied Economics. 11(1): 151–172. Retrieved from: https://gps.ucsd.edu/_files/faculty/graff-zivin/graffzivin-publication-2019-01.pdf; Hanna, Rema; Oliva, Paulina. (2011, August). The effect of pollution on labor supply: Evidence from a natural experimentin Mexico City. Cambridge, MA: NBER Working Paper Series. Retrieved from: https://economics.yale.edu/sites/default/files/hanna-120917.pdf
23 Science Daily. (2018, March). Green spaces in cities help control floods, store carbon. Science News. Retrieved from:https://www.sciencedaily.com/releases/2018/03/180306101706.htm
24 See here for an idea of how the financial community uses the concept of a transmission channel: Basel Committee on Banking Supervision. (2011,
February). Working Paper No. 18: the transmission channel between the financial and real sectors: a critical survey of the literature. Bank forInternational Settlements (BIS). Retrieved from: https://www.bis.org/publ/bcbs_wp18.pdf
25 van Toor, Joris; van Oorschot, Mark et al. (2020, June). Indebted to nature: Exploring biodiversity risks for the Dutch financial sector. The Hague: De
Nederlandsche Bank (DNB); Planbureau voor de Leefomgeving (PBL). Retrieved from: https://www.pbl.nl/sites/default/files/downloads/4215indebted_to_nature_-_exploring_biodiversity_risks_for_the_dutch_financial_sector_0.pdf
26 The specific NGFS paper drawn upon: See endnote 727 ibid: p.6
28 See endnote 25: p.13
29 See endnote 7: p.6
30 Gilbert C.L., Morgan C.W. (2010, September). Food price volatility. Philos. Trans. R. Soc. B. 2010;365:3023–3034. Retrieved from:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2935118/#s3title
31 Rechtsteiner, Roland; Frankl, Ernst. Turn volatile commodity prices to your advantage. Oliver Wyman Insightshttps://www.oliverwyman.com/ourexpertise/insights/2013/sep/turn-volatile-commodity-prices-to-your-advantage.html
32 Unerman, Jeffrey; Bebbington, Jan; O’Dwyer, Brendan. (2018, June). Corporate reporting and accounting for externalities. International Accounting
Policy Forum. 48 (5). Retrieved from: https://doi.org/10.1080/00014788.2018.1470155
33 See: Henseler, Martin, Delzeit, Ruth, Adenäuer, Marcel, Baum, Sarah, and Kreins, Peter. "Nitrogen Tax and Set-Aside as Greenhouse Gas Abatement
Policies Under Global Change Scenarios: A Case Study for Germany." Environmental & Resource Economics 76.2-3 (2020): 299-329. Web.

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Handbook for Nature-related Financial Risks
Key concepts and a framework for identification

34

Accounting for Sustainability (A4S). (2019, December). Financing out future: Actions to scale up and accelerate the pace of change towards a moresustainable financial system. Accounting for Sustainability (A4S). p. 9. Retrieved from:https://www.accountingforsustainability.org/content/dam/a4s/corporate/home/KnowledgeHub/Guidepdf/Financing%20our%20Future%20update%202019.pdf.downloadasset.pdf
35 Carbon Disclosure Project (CDP). (2017, November). CDP Global Water Report 2017: A turning tide: Tracking corporate action on water security.
Carbon Disclosure Project (CDP). Retrieved from: https://6fefcbb86e61af1b2fc4c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/002/824/original/CDP-Global-Water-Report2017.pdf?1512469118
36 Caldecott, Ben; Howarth, Nicholas; McSharry, Patrick. (2013, August). Stranded Assets in Agriculture: Protecting Value from Environment-Related
Risks. Oxford: Smith School of Enterprise and the Environment. Retrieved from: https://www.smithschool.ox.ac.uk/publications/reports/strandedassets-agriculture-report-final.pdf
37 Repsol. (2019, December). Repsol will be a net zero emissions company by 2050. Press release. Retrieved from: https://www.repsol.com/en/pressroom/press-releases/2019/repsol-will-be-a-net-zero-emissions-company-by-2050.cshtml
38 See Endnote 25: p.13
39 Pergler, Martin; Lamarre, Eric. (2009, January). Upgrading your risk assessment for uncertain times. Mckinsey & Company: McKinsey Working Papers
on Risk. 9: p. 2
https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/risk/working%20papers/9_upgrading_your_risk_assessment_for_uncertain_tim
es.ashx
40 ibid41
ibid: p.3
42 Adapted from: Schoenmaker, Dirk. (1996) Contagion Risk in Banking. The Hague: Ministry of Finance: p.86. Retrieved from:https://web.actuaries.ie/sites/default/files/erm-resources/345_contagion_risk_in_banking.pdf
43 Natural Capital Finance Alliance (NCFA). Natural capital assets. Retrieved from: https://encore.naturalcapital.finance/en/ecosystem_services/4
44 United States Environmental Protection Agency (EPA). Using trees and vegetation to reduce heat islands. Retrieved from:https://www.epa.gov/heatislands/using-trees-and-vegetation-reduce-heat-islands
45 Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES). (2017, March). Report of the Executive Secretary on theimplementation of the work programme for the period 2014-2018. Bonn: IPBES: p.6. Retrieved from:https://www.ipbes.net/sites/default/files/downloads/pdf/ipbes-5-inf-24.pdf
46 Air Quality Expert Group. Impacts of vegetation on urban pollution. Department for Environment, Food and Rural Affairs (Defra). Retrieved from:https://uk-air.defra.gov.uk/assets/documents/reports/cat09/1807251306_180509_Effects_of_vegetation_on_urban_air_pollution_v12_final.pdf
47 See endnote 19
48 Zivin, Joshua Graff, and Matthew Neidell. "Air Pollution's Hidden Impacts." Science (New York, N.Y.) 359.6371 (2018): 39-40. Web.
49 Food and Agriculture Organization of the United Nations. Forest and Water: Basic Knowledge. Retrieved from: http://www.fao.org/sustainableforest-management/toolbox/modules/forest-and-water/basic-knowledge/en/?type=111
50 McDonald, Robert I., Weber, Katherine F., Padowski, Julie; Boucher, Tim; Shemie, Daniel. (2016, July). Estimating watershed degradation over the lastcentury and its impact on water-treatment costs for the world’s large cities. Washington: Proceedings of the National Academy of Sciences of theUnited States of America (PNAS). Retrieved from: https://www.pnas.org/content/113/32/9117
51 Xu J. et al. (2019) Sustaining Biodiversity and Ecosystem Services in the Hindu Kush Himalaya. In: Wester P., Mishra A., Mukh erji A., Shrestha
A. (eds) The Hindu Kush Himalaya Assessment. Springer, Cham. Retrieved from: https://link.springer.com/chapter/10.1007/978-3-319-92288-1_5
52 Adaptation of IPBES #11, #12 and #13: See endnote 45
53 U.S Fish & Wildlife Service (FWS). The cost of invasive species. FWS: The Economic Impacts. Retrieved from:https://www.fws.gov/verobeach/PythonPDF/CostofInvasivesFactSheet.pdf
54 Barbier, Edward B. (2018, November). Chapter 27: The value of coastal wetland ecosystem services. Perillo, Gerardo M.E.; Wolanski, eric; Cahoon,
Donald R.; Hopkinson, Charles S. (eds). Coastal Wetlands: An Integrated and Ecosystem Approach, 2 nd Edition. Elsevier. Retrieved from:https://doi.org/10.1016/B978-0-444-63893-9.00027-7
55
Cornell University Cooperative Extension. The carbon cycle and soil organic carbon. Ithaca: Agronomy Fact Sheet Series. Fact Sheet 9. Retrieved from:http://nmsp.cals.cornell.edu/publications/factsheets/factsheet91.pdf
56 Renard, D., Tilman, D. (2019). National food production stabilized by crop diversity. Nature 571, 257–260. https://doi.org/10.1038/s41586-019- 1316y
57
Planet Tracker. (2019, September 17). Sustainable fishing can reverse decline of Japan’s seafood industry, maximise profits and reduce financial andreputational risk for investors. Retrieved from: https://planet-tracker.org/sustainable-fishing-can-reverse-decline-of-japans-seafood-industry-maximiseprofits-and-reduce-financial-and-reputational-risk-for-investors/#_ftn658
Coastal Wiki. Pollution and Pelagic fish. Retrieved from: http://www.coastalwiki.org/wiki/Pollution_and_pelagic_fish
59 Natinoal Oceanic and Atmospheric Administration (NOAA). Coral reef ecosystems. Retrieved from: https://www.noaa.gov/education/resourcecollections/marine-life/coral-reef-ecosystems
60 Zeitvogel, Karin. (2011, February). World’s coral reefs could be gone by 2050: study. Phy.Org. Retrieved from: https://phys.org/news/2011-02-worldcoral-reefs.html
61 Discussed and referenced within: Winkler, Klara J.; Viers, Joshua H.; Nicholas, Kimberly A. (2017, April). Assessing Ecosystem Services andMultifunctionality for Vineyard Systems. Front. Environ. Sci. 5 (15). Retrieved from: https://www.frontiersin.org/articles/10.3389/fenvs.2017.00015/full
62 See endnote 54
63 https://phys.org/news/2018-06-habitat-fragmentation-disease-outbreaks.html
64 Utilising NCP #8 and #9 from IPBES: See Endnote 45
65 Scottish Environment Protection Agency (SEPA). (2015, December). Natural Flood: Management Handbook. Stirling: Scottish Environment Protection
Agency (SEPA). Retrieved from: https://www.sepa.org.uk/media/163560/sepa-natural-flood-management-handbook1.pdf
66
Science Daily. (2020, March). Mangrove conservation can pay for itself in flood protection. Science News. Retrieved from:https://www.sciencedaily.com/releases/2020/03/200310094242.htm

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Zhang, Congwen; Boyle, Kevin J. (2010, December). The effect of an aquatic invasive species (Eurasian watermilfoil) on lakefront property values.
Ecological Economics. 70 (2). Retrieved from: The effect of an aquatic invasive species (Eurasian watermilfoil) on lakefront property value Doi:
10.1016/j.ecolecon.2010.09.011
68 Philips, Stephen; Darland, Tim. (2005, February). Potential economic impacts of zebra mussels on hydropower facilities in the Columbia river basin.
Bonneville Power Administration. Retrieved from: https://core.ac.uk/download/pdf/37775042.pdf; See endnote 53
69 Science Based Targets Network. (2020, September). Science-based Targets for Nature: Initial Guidance for Business. Retrieved from:https://sciencebasedtargetsnetwork.org/wp-content/uploads/2020/09/SBTN-initial-guidance-for-business.pdf
70 see Endnote 25: p.26
71 European Commission. (2020). Farm to Fork Strategy: for a fair, healthy and environmentally friendly food system. European Union: p.11. Retrieved
from: https://ec.europa.eu/food/sites/food/files/safety/docs/f2f_action-plan_2020_strategy-info_en.pdf
72 UN Environment. Polluter pays Principle definition. Retrieved from: https://globalpact.informea.org/glossary/polluter-pays-principle
73 United States Environmental Protection Agency (EPA). Section 404 of the clean water act: Mitigation banks under CWA Section 404. Retrieved from:https://www.epa.gov/cwa-404/mitigation-banks-under-cwa-section-404
74 Barnsley Local Plan. (2019, May). Supplementary Planning Document: Open Space Provision on New Housing Developments. Barnsley Metropolitan
Broough Council. Retrieved from: https://www.barnsley.gov.uk/media/15716/open-space-provision-on-new-housing-developments-spd.pdf; Huseyin,
Huseyin. Biodiversity net gain on all new property developments. Harold Benjamin: Legal minds, business thinking. London: Financial Stability Board(FSB). Retrieved from: https://www.haroldbenjamin.com/site/blog/harold-benjamin-blog/biodiversity-net-gain-on-all-new-property-developments
75 Definition adapted from: Task force on climate-related financial disclosures (TCFD). (2017, June). Final Report: Recommendations of the Task force on
climate-related financial disclosures https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf
76This is often referred to as Integrated Landscape Management. See: United Nations Environment Programme (UNEP). (2019). Land Restoration for
Achieving Sustainable Development Goals. UNESCO: p.128. Retrieved from: https://www.resourcepanel.org/reports/land-restoration-achievingsustainable-development-goals
77 See Endnote 7: p.5
78 Capelle-Blanchard, Gunther; Laguna, Marie-Aude. (2010, March). How does the stock market respond to chemical disasters?. Journal on
Environmental Economics and Management. 59 (2). https://doi-org.ezp.lib.cam.ac.uk/10.1016/j.jeem.2009.11.002
79 Whelan, T., Kronthal-Sacco, R. (2019, June). Research: Actually, Consumers do buy sustainable products. Harvard Business Review. Retrieved from:https://hbr.org/2019/06/research-actually-consumers-do-buy-sustainable-products
80 See endnote 881 Harrison, James. (2018, September). Significant International Environmental Law Cases: 2017-18. Journal of Environmental Law. 30. 527:541.
https://www.law.ed.ac.uk/sites/default/files/2019-07/Significant%20International%20Environmental%20Law%20Cases-%202017%E2%80%9318.pdf
82 Prager, Alicia. (2018, June). $29 million deforestation fines: game changer for Brazilian soy trade?. Mongabay Series: Amazon Agribusiness. Retrieved
from: https://news.mongabay.com/2018/06/29-million-deforestation-fines-game-changer-for-brazilian-soy-trade/
83 Rothenberg, Eric; Nicksin, Bob. (2019, June). Maritime Environmental Law Update. O’Melveny & Myers LLP. Retrieved from:https://www.lexology.com/library/detail.aspx?g=05189dac-796a-450a-9de2-06e0e9f7f571
84 Rushe, Dominic. (2015, July). BP set to pay largest environmental fine in US history for Gulf oil spill. The Guardian. Retrieved from:https://www.theguardian.com/environment/2015/jul/02/bp-will-pay-largest-environmental-fine-in-us-history-for-gulf-oil-spill; The Associated Press.
(2007, March). Fines assessed in biggest ocean dumping case; NBC News: Retrieved from: http://www.nbcnews.com/id/17741888/ns/us_newsenvironment/t/fines-assessed-biggest-ocean-dumping-case/#.XsuOnahKiUk; Owen Lomas, THE PROSECUTION OF MARINE OIL POLLUTION OFFENCES
AND THE PRACTICE OF INSURING AGAINST FINES, Journal of Environmental Law, Volume 1, Issue 1, 1989, Pages 48–64, https://doiorg.ezp.lib.cam.ac.uk/10.1093/jel/1.1.48
85 See endnote 3: p.7
86 For how forests support flood control see: Forest Research. (2021). Cases for and against forestry reducing flooding. Forest Research: Publications
and Research. Retrieved from:https://www.forestresearch.gov.uk/research/can-forestry-reduce-flooding/cases-for-and-against-forestry-reducing-flooding/; For how the conversion of land can reduce flood control see: World Wildlife Fund (WWF). The Alps are the freshwater reservoir of Europe. Retrieved
from: https://wwf.panda.org/knowledge_hub/where_we_work/alps/problems/freshwater/
87 Das, Saudamini; Crépin, Anne-Sophie. (2013, December). Mangroves can provide protection against wind damage during storms. Estuarine, Coastal
and Shelf Science. 134. 98:107. Retrieved from: https://www.sciencedirect.com/science/article/abs/pii/S0272771413004289
88 Sil, Ângelo; Fernandes, Paulo M.; Paula Rodrigues, Ana; Alonso, Joaquim M.; Honrado, João P.; Perera, Ajith; Azevedo, João C.. (2019, April)
Farmland abandonment decreases the fire regulation capacity and the fire protection ecosystem service in mountain landscapes.
Ecosystem Services. 36. Retrieved from: https://www-sciencedirect-com.ezp.lib.cam.ac.uk/science/article/pii/S2212041618303425
89 Basel Committee on Banking Supervision, 1996)
90
Amir Hossein Sabet, Amir; Cam, Marie-Anne; Heaney, Richard. (2012, April). Share market reaction to the BP oil spill and the US government
moratorium on exploration. Australian Journal of Management. 37 (1). Retrieved from: https://doiorg.ezp.lib.cam.ac.uk/10.1177%2F0312896211427321
91 Carpentier, Cécile; Suret, Jean-Marc. (2015, May). Stock market and deterrence effect: A mid-run analysis of major environmental and nonenvironmental accidents. Journal of Environmental Economics and Management. 71. Retrieved from: https://doiorg.ezp.lib.cam.ac.uk/10.1016/j.jeem.2015.01.001
92 Kowalewski, Oskar; Śpiewanowski, Piotr. (2020, December). Stock market response to potash mine disasters. Journal of Commodity Markets. 20.
Retrieved from: https://doi-org.ezp.lib.cam.ac.uk/10.1016/j.jcomm.2020.100124
93 Corporate Finance Week. (2016, August). Corporate financing week - 01 august 2016. London: Fitch Solutions Group Limited. Retrieved fromhttps://ezp.lib.cam.ac.uk/login?url=https://www-proquest-com.ezp.lib.cam.ac.uk/reports/corporate-financing-week-01-august2016/docview/1817106026/se-2?accountid=9851, p.10
94 See endnote 2
95
Bayer Crop Science Division. Our commitment to sustainability. Retrieved from: https://www.modernag.org/biodiversity/beeconomy-economicvalue-pollination/
96 NGFS Occassional Paper, Case Studies of Environmental Risk Analysis Methodologie (September 2020), p.VII

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Burgering, Casper. (2018, 23 November). Cocoa price set to increase. ABN AMRO https://insights.abnamro.nl/en/2018/11/cocoa-price-set-toincrease/ https://insights.abnamro.nl/en/2018/11/cocoa-price-set-to-increase/
98 For details of the biodiversity tipping point in the Amazon see: HM Treasury. (2020, April). The Dasgupta Review – Independent review on theeconomics of biodiversity: Interim Report. p.41. Retrieved from:https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/882222/The_Economics_of_Biodiversity_The_Das
gupta_Review_Interim_Report.pdf; Lovejoy, T. E. and Nobre, C. (2018). Amazon tipping point. Science Advances. DOI: 10.1126/sciadv.aat2340; deBolle, M. (2019). The Amazon Is a Carbon Bomb: How Can Brazil and the World Work Together to Avoid Setting It Off?. Peterson Institute for Internal
Economics. Retrieved from: https://www.piie.com/sites/default/files/documents/pb19-15.pdf
99 See endnote 3: p.7
100 Water and Sanitation-Related Diseases and the Environment: Challenges, p.432
101 See endnote 8: p.359

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