Nature loss is a financial risk. The UK should act now.

Key points

• The UK economy relies heavily on nature. Loss from nature could potentially disrupt up to £1.1tn across sectors like real estate, construction, agriculture and retail.

• Nature degradation increases flood, drought and wildfire risks that drive up business costs, insurance claims and consumer prices.

• Nature extends beyond the UK’s domestic borders. UK construction and retail depend on £25bn and £15bn of imports, respectively, from overseas supply chains that require healthy ecosystems for water supply and flood mitigation, meaning global nature loss directly threatens UK economic resilience.

• Because of the importance of nature on the UK economy, the Bank of England’s Prudential Regulation Authority should integrate nature loss into climate-risk supervision, aligning with NGFS guidance and ECB-style enforcement.

The health of the UK economy depends on nature. As a guardian of financial stability, the Bank of England (BoE) cannot afford to overlook this connection. It is time for the BoE’s Prudential Regulation Authority (PRA) to integrate nature loss into its supervision of climate risk and strengthen enforcement where financial institutions fail to include nature and climate risks in their materiality assessments.

When it comes to building a resilient economy, attention often turns to upskilling workers, attracting capital, keeping multinationals in the UK and mitigating supply chain risks. But this overlooks a critical ingredient: the natural environment.

Nature is the hidden infrastructure that supports sectors across the UK economy, but it is seldom perceived in this way. Everyone is quick to notice — and complain about — potholes and failing rail services, but the natural infrastructure that underpins the economy is often taken for granted. Even when confronted with the significant impacts of nature loss, many fail to identify the centrality of its role.

The flow of finance into businesses that degrade the environment is a critical driver of nature loss. The BoE can play a role in addressing this because it has the supervisory clout to incentivise the UK’s banks and insurers to invest in nature, and identify and manage the financial risks associated with nature degradation, including reducing the amount of funding they put into activities that harm it.

The role of nature in the economy

Nature is vital infrastructure for the UK economy and we can even quantify its monetary value. New data suggests nature loss could disrupt the UK economy to the tune of £1.1tn across a swathe of sectors including real estate, automotive, construction and agriculture. It’s an astounding figure, yet for some sectors the connection with nature isn’t immediately visible.

Nature supplies obvious provisions like land, water and natural resources that many sectors consume as part of production. But it also provides less visible infrastructure, including flood defences and rainfall regulation, as well as moisture retention, which reduces the likelihood and intensity of drought and associated wildfires.

When natural landscapes are degraded, their ability to absorb excess water and retain moisture is weakened, increasing the risk of flooding, drought and wildfires. The BoE regards flooding as the country’s “largest source of physical climate risk” to households and businesses. But nature loss is a critical part of this risk equation too, given the myriad ways it can trigger and exacerbate extreme weather events.

Damage to nature triggers and exacerbates financial damage to businesses and the economy. It can lead to hikes in operating costs and capital expenditure for businesses, insurers and reinsurers paying out enormous sums on claims, hours of lost staff productivity through physical displacement, and, ultimately, price rises for consumers.

You don’t have to look far to see how the UK’s agriculture sector is underpinned by nature. £15bn of the sector is highly dependent on the health of the environment in the UK. Agriculture may not be among the country’s top GDP contributors, but it is strategically important given its relationship with food security and inflation.

The real estate sector is worth £250bn to the UK economy and there are highly visible indicators of its dependence on nature domestically. Increasingly frequent and severe floods, and associated property damage, business shutdowns and disruption to daily life, are worsened by activities like wetland drainage, river modification and construction in and around villages. A tenth of UK businesses are situated on floodplains.

Building on floodplains not only makes new developments prone to flooding, but can also increase risks in surrounding and downstream areas. The UK Environment Agency estimates potential economic costs of flooding from surface water to properties at £1.2bn annually.

But the vital backbone that nature provides the UK economy reaches sectors far removed from primary industry — and the economy is affected not just by nature loss at home, but globally.

The UK construction sector relies on £25bn of imports that depend on nature in countries where materials are manufactured before being exported to the UK. Healthy natural ecosystems abroad supply the water needed for manufacturing and mitigate flooding, which can disrupt factories and plants feeding the sector’s overseas supply chains. In 2024, the UK imported almost 6m tonnes of water-hungry finished steel.

Likewise, £15bn of imports that feed the UK retail and consumer goods sector depend on the health of nature in countries abroad, where suppliers are based. Natural flood mitigation provided by healthy ecosystems plays a key role in ensuring a steady supply of consumer goods to the UK retail sector from factories overseas. Last year, the UK imported £17.7bn worth of clothing, much of it from supply chains in South Asia. In Bangladesh, which lost 15,000 hectares (58 square miles) of natural forest last year alone, severe flooding at Chattogram Port disrupted the international shipping of clothing in July 2026, for instance.

Economic performance and nature recovery are not opposing sides of a trade-off but in fact go hand-in-hand. To achieve economic resilience, we must direct finance into activities that protect and restore nature rather than harm it.

This relationship has not received nearly enough attention.

How the BoE can step up action

The BoE may have climate change on its radar, but the PRA does not currently set specific expectations for financial institutions when it comes to nature beyond requiring companies to manage the financial risks to which they are exposed. The PRA resisted requests to include nature risk when it consulted on its supervisory update last year.

As a member of the Network for Greening the Financial System (NGFS), the BoE should step up action on nature loss in line with its peers, such as the European Central Bank (ECB), which has interwoven nature loss with climate-related financial disclosures.

Currently, the PRA works from an assumption that climate change acts alone in causing acute, chronic and tipping point events. It needs instead to recognise that nature loss can cause the intensification of systemic risk. Risks additionally depend on firms’ and economies’ exposure to nature loss and the state of nature. Nature loss and climate change should be examined both together – to ensure that interactions between them are fully accounted for – and in isolation from each other – to ensure that nature-specific data and modelling challenges are addressed.

The PRA should follow the NGFS’ guidance and ensure that nature loss and its exacerbating effects are properly taken into account in banks’ and insurers’ risk assessments. Similar to climate change, nature loss should be embedded in governance, risk management, climate scenario analysis, data, disclosures and entity-specific requirements.

Moreover, to be effective, the PRA’s supervisory climate and nature requirements need clear enforcement measures. There are strong precedents of other regulators applying more robust enforcement linked to time-bound requirements. These include banks under the supervision of the ECB receiving binding supervisory decisions in 2023 for failing to include climate and nature-related risks in materiality assessments, with some warned of periodic penalty payments (such as one-day breach fines) if issues remained unresolved by specified deadlines. The BoE should consider a similar, more muscular approach.

Investment in nature is an investment in the UK economy’s resilience. It is time the BoE starts taking stronger action on this.

Written by