The highest materiality ecosystem services are concentrated within a few economic sectors across our sample. In particular, six economic sectors represent a combined share of 60 percent of the exposures linked to high or very high dependencies (construction and real estate; crop and animal production; wholesale and retail trade; manufacture of food products; and electricity, gas, and other utilities). Among them, construction and real estate is the most exposed, making up more than 20 percent of all sector dependencies (Figure 5).<sup>13</sup> This can be explained as both sectors are generally a large share of bank lending, especially in fast growing emerging market economies, while they are highly dependent on abundant surface and ground water.

The negative correlation of dependency to income status is expected and seems to be related to the economic structure of those countries. Lower income countries usually have a higher share of the agriculture sector in their economy, which directly depends on multiple ecosystem services. Conversely, higher income countries in our sample have a larger service sector, which depends less directly on ecosystem services and thus exhibits lower exposures to physical risks (Figure 3 – Panel C). It should be noted, however, that ENCORE only captures direct dependencies, while indirect dependencies via supply chains and international trade cannot be assessed. Environmental footprint analysis captures such indirect dependencies by assessing the resource use of goods and services at consumption level. The environmental footprints of advanced economies are usually higher than the ones for emerging markets and developing economies (EMDEs) (Global Footprint Network 2022). This indicates that also less directly dependent economies could potentially be exposed to nature-related physical risks.

Across our sample, climate regulation, flood and storm protection, surface water, and groundwater, are the ecosystem services of highest dependency for banks’ portfolios (see Figure 4). This finding is in line with the studies analyzing financial sector exposure in Brazil (Calice et al.,2021), Netherlands (van Toor et <u>al., 2020) and France (Svartzman et al., 2021). Of every dollar that banks lend to corporates, 31 and 21</u> cents are either highly or very highly dependent on climate regulation, and flood and storm protection, respectively. Both services are essential for climate mitigation and adaptation, demonstrating the close linkages between nature loss and climate change. Mauritius, India, and the United Arab Emirates have a particularly high exposure to those ecosystem services (Figure 6).

Banks’ portfolios in lower-income countries are more exposed to water-related ecosystem services. These differences are more evident in the case of surface and groundwater. For instance, of every dollar that banks lend to firms, 26 cents are either highly or very highly dependent on surface water in lower-middleincome countries. This compares to 20 cents per dollar in the case of upper-middle-income and 12 cents per dollar for high-income countries. The divergence is on a similar order of magnitude for groundwater but to a lower extent for water quality and water flow maintenance (Figure 7). Pakistan, Argentina, and loan-level data and daily regulatory reports of all securities held at the security issuance level (NGFS-INSPIRE, 2022). Using significantly more aggregated information, our estimate is 6 percentage points lower.

> 13 It should be noted that the indicated dependencies on the global sectoral averages are from the ENCORE database. However, ecosystem service dependencies may vary depending on the project design and should ultimately be evaluated at the project level. For example, a real estate investment that adheres to the passive house standard (a green building standard) may rely much less on ecosystem services such as water compared to traditional real estate projects.

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