Almost 75% of bank loans to companies highly dependent on nature, says ECB

June 14, 2023|Written by |European Central Bank

Preliminary findings from European Central Bank’s research that almost 75% of all bank loans are provided to companies highly dependent on at least one ecosystem service. If nature degradation continues, these companies may be negatively impacted and subsequently cause significant risks to bank credit portfolios.

ECB board member Frank Elderson revealed the preliminary findings on the interdependent nature between biodiversity and the risks posed to the economy and finance, underlining that nature loss is “existential for the economy and the financial system”.

The study assessed 4.2mn companies within the EU, examining over €4.2tn in corporate loans, assessing the reliance of eurozone companies and banks on ecosystem services such as food, drinking water or timber and minerals.

Pointing to the physical risks, Elderson explained the cascading effects of biodiversity loss. For instance, declines in pollinating insects cause falling crop yields. The scarcity of nature’s products may also lead to supply-side shocks affecting industries such as pharmaceuticals and tourism.

The UN Convention on Biological Diversity established global targets in 2022, including the conservation of at least 30% of the world’s lands, inland waters, coastal areas and oceans. Elderson emphasised that international agreements such as this, along with new business models, could lead to transition risks and costs as companies are forced to adapt.

Elderson’s remarks reinforce the numerous studies highlighting the financial system’s dependence on nature. S&P Global launched a nature and biodiversity risk dataset which found that 85% of the world’s biggest companies depend significantly on nature for their operations. Similarly, Banque de France found that 42% of securities portfolios held by French financial institutions consists of securities issued by companies dependent on at least one ecosystem service.

Bank Negara Malaysia and the World Bank found that 54% of commercial loan portfolios were exposed to sectors highly dependent on ecosystem services, while 87% are exposed to sectors that strongly and negatively impact these services. In addition, last week Banco de México reported that a significant share of bank credit portfolios are “highly or very highly dependent on nature and its ecosystem services”.

To address these risks, the Network for Greening the Financial System and research network Inspire established a joint study group on biodiversity and financial stability and the ECB has already published a guide for lenders on how to address climate and environmental risks in risk management practices and disclosures. However, Elderson stressed greater urgency, saying that “we as ECB [sic] have to take nature-related risks into account in the pursuit of our mandate”.

This page was last updated June 14, 2023

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