The continued unchecked degradation of nature and climate will lead to more frequent and severe macroeconomic disruptions, compounding risks to financial stability. Yet while climate-related risks have begun to feature in financial frameworks, the assessment of nature-related risks is still largely an afterthought. That is despite the clear connections between the climate and nature crises which amplify both physical and transition risks.
Without integrating these risks, assessments of financial stability will continue to underestimate systemic dangers that nature’s decline poses to the economy and society. Central banks and supervisors, whose mandates include ensuring price stability and safeguarding financial institutions, can no longer afford to ignore nature-related risks. As Frank Elderson of the European Central Bank (ECB) has argued, incorporating these risks is not just consistent with central banks’ mandates but essential to fulfilling them.
Central banks have a unique vantage point and significant influence on the financial system and the underlying real economy it fuels. Beyond their traditional roles, they can and should influence the broader transition towards an economy that works for nature, climate and people by taking charge and, in turn, raising awareness about the critical value of nature to the economy. They should do this alongside their consideration of climate to avoid misguided policy interventions that undermine financial stability.
New insights from integrated climate-nature scenarios
A groundbreaking report – undertaken collaboratively by the Potsdam Institute for Climate Impact Research, the ECB, NatureFinance, and the University of Minnesota – aims to address this challenge. By developing integrated climate-nature policy scenarios, the project provides financial stakeholders with tools to better understand the interconnected risks posed by nature degradation and climate change by exploring different policy scenarios.
The initiative combines macroeconomic and biophysical models to assess risks in the agricultural and land-use sector globally from 2020 to 2050. It evaluates critical indicators like reduced levels of pollination and increased soil erosion, offering a comprehensive framework to understand the multi-dimensional risks of climate and nature degradation.
The findings underscore the importance of integration. Unsurprisingly, under a business-as-usual trajectory which lacks effective climate and nature policies, climate risks will continue taking their toll in a world where global mean temperature is projected to increase to 4°C by the end of the century. This scenario will see significant degradation to biodiversity and other ecosystem services, the functions provided by nature such as flood prevention and clean water that support society and the economy.
At the same time, a focus on implementing climate-only policies will fail to safeguard biodiversity despite addressing greenhouse gas emissions.
Large-scale monoculture afforestation projects are a perfect example of a narrow focus on mitigating some climate risks. Despite increasing forest cover and carbon sequestration, their tendency to focus on single and non-native tree species can negatively impact biodiversity and the overall resilience of natural assets. At a large enough scale, projects like this can affect critical sectors like agriculture which then impacts food security.
While there is no single solution, the climate-nature scenarios project shows integrated policies could help stabilise the negative economic impacts on the agricultural sector while curbing biodiversity loss and limiting temperature rises. For example, integrated policies could de-risk farmers’ transition by supporting regenerative agriculture through financial incentives, insurance schemes and payments for ecosystem services.
In the medium- to long-term, integrated climate-nature policies could help scale solutions that reduce systemic physical climate risks and ensure more economic stability for all, while also supporting biodiversity restoration along with enhanced ecosystem health and resilience.
Evidence to drive action
To equip central banks and financial regulators with tools to address climate change and nature degradation, several research and policy priorities must be addressed. In terms of research, further work must be carried out to develop integrated models which capture the existing feedback loops between economic activity and environmental degradation, highlighting how ecosystem service loss amplifies systemic risks. It is important to further map the transmission channels through which these nature-related risks then affect financial and price stability.
Using high-resolution, localised data can help model regional impacts by capturing the site-specific nature of ecosystem services and economic risks. For vulnerable sectors like agriculture, research can focus on short-term shocks such as droughts and floods to better understand how they could lead to immediate economic impacts.
In terms of policy, an important shift must happen. We must go from simply diagnosing risks to implementing actionable measures, even amid uncertainty. A first step would be to incorporate climate and nature-related risks into the monetary policy implementation toolkit, including management of central banks’ own balance sheets and collateral frameworks that set the terms for commercial banks to borrow from them.
Macroprudential supervision tools can also be deployed to address systemic risks, such as higher capital requirements for commercial banks failing to account for nature and climate risks. This shift could be enabled by international cooperation between central banks through platforms like the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), and supported by clear regulatory frameworks from policymakers such as mandating climate and nature transition plans for financial institutions.
Charting a way forward
Central banks and financial institutions are uniquely positioned to contribute to creating an economy that works for the natural world and human society. For example the NGFS has extended its work beyond climate to consider nature in the context of ensuring continued financial stability. Some central banks have also been exploring the integration of climate and nature risks into their financial risk assessments such as the ECB, Banco Central do Brasil and Hungary’s Magyar Nemzeti Bank among others.
Beyond central banking policies, broader regulatory shifts are reshaping the landscape within the real economy. This includes regulations such as the EU’s deforestation regulation and corporate sustainability reporting directive. However, recent pushback against aspects of these regulations creates uncertainty for what lies ahead.
Nonetheless, more needs to be done or the consequences will be disastrous, ranging from a future of mass food insecurity to human displacement and relentless conflicts and wars. A nature-positive economy is not just an ideal – it is an imperative. Without it, the economic and environmental losses we are already witnessing will only escalate with devastating results for both people and the planet.
This page was last updated March 20, 2025
Written by
Sarah Krisht is nature risk lead at NatureFinance. She previously worked in a range of advisory and strategic consultancies. She has also contributed to key natural capital initiatives for the UK government. Sarah holds a BA in economics from the American University of Beirut and an MSc in environmental economics and climate change from the London School of Economics.
