<u>Power et al. 2022, Monnin 2022). A recent report by the Network of Central Banks and Supervisors for</u> Greening the Financial System (NGFS), a group of central banks and supervisors committed to developing best practices to manage climate-related risks and mobilizing capital for green and low-carbon investments, offers a set of recommendations for financial regulators and supervisors with regard to nature loss (NGFS-INSPIRE, 2022). Those recommendations include (i) recognizing nature loss as a potential source of economic and financial risk; (ii) building skill and capacity to assess and address those risks; (iii) exploring options for supervisory actions on managing biodiversity-related risks and minimizing negative impacts on ecosystems; and (iv) helping build the necessary financial architecture for mobilizing investment for a biodiversity-positive economy. To further advance the currently nascent knowledge base for potential supervisory action, the NGFS launched a new task force on nature-related risks (NGFS 2022).

Yet, the assessment of nature-related financial risk exposure is still nascent and only a handful of central banks have done so. This paper expands the scope of such analyses by providing high-level assessments of nature-related financial risk exposure for 20 emerging market economies, relying on publicly available information and data. The approach in this paper follows pioneering efforts by De Nederlandsche Bank (van Toor et al., 2020), and subsequently by the World Bank (Calice et al.,2021), Banque de France and AFD (Svartzman et al., 2021), and Bank Negara Malaysia (World Bank and BNM, 2022). This report's analysis can offer initial insights into banks’ exposure to possible nature-related physical risk for emerging market economies. However, given its high-level nature and prevailing data gaps, estimates in this paper should be treated as a starting point for more in-depth analysis that would rely on unpublished data from local authorities. Furthermore, shifting from exposure analysis to a comprehensive assessment of naturerelated risks requires the development of relevant scenarios and a better understanding of sectoral and asset level economic and financial vulnerabilities, including the consideration of indirect impacts.

The analysis offers four key findings. First, nature-related financial risk exposure is generally high (above 50 percent on average) across the sample countries. Second, higher exposure tends to be negatively correlated with countries’ income level, highlighting the relevance of economic structure. When considering more indirect dependencies on ecosystem services via supply chains and trade, this correlation might change, however. Third, the highest dependencies on ecosystem services across countries tend to be on climate regulation and flood and storm protection, indicating the interconnectedness of climate change and nature loss. Finally, high dependencies on ecosystem services are concentrated in few sectors, with construction and real estate explaining more than 20 percent of all banking sector dependencies.

The remainder of this paper is organized as follows. Section 2 presents the methodology and the data used for the analysis. Section 3 presents the key results while section 4 concludes.

# **2. Methodology and data**

This paper conducts a multi-country assessment of the dependency of banking systems on ecosystem services in 20 emerging market economies. The analysis serves as an indication of banking sector exposure to nature loss, specifically to nature-related physical risks. In this section, we describe the data sources as well as the applied methodology.

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