Scientists have determined that we have already breached the limits of six planetary boundaries, and others are at risk. The concern is that continued degeneration could trigger irreversible environmental changes. Despite these very real risks, however, there is some good news. The reversal of the Antarctic ozone hole, which was breached as a result of increased concentrations of anthropogenic ozone-depleting chemical substances, is a great example of the impact of decisive action. Thanks to international action taken as a result of the Montreal Protocol, the ozone layer appears to be heading toward staying within the planetary boundary threshold.

This is why it is so important for organizations, and financial institutions in particular, to demonstrate leadership in mitigating nature-related risks. Concurrently, they may also tap into the many value creation opportunities that exist.

Institutions face heightened exposure to nature-related threats in their corporate and investment portfolios. Those with a heavy concentration of investment in key industries such as agriculture or forestry, for example, may need to begin pricing in the risk of lower crop yields, weighing the potential for species loss, and calculating the resulting financial impacts. An analysis by the European Central Bank (ECB), for example, found that 75% of bank loans to companies operating in the euro area went to companies that had at least one major nature-related dependency.

Pressure from regulators is mounting, too. The Network for Greening the Financial System, consisting of more than 100 central banks, flagged nature as having significant macroeconomic and financial implications and recommends that institutions stress-test for biodiversity-related financial risks. In Europe, the ECB has begun to set supervisory expectations on risks stemming from biodiversity loss, water stress, pollution, and other environmental factors. And the EU Corporate Sustainability Reporting Directive has created mandatory disclosure requirements on key nature dimensions.

Globally, the market consensus is that nature-related disclosures will become mandatory for financial institutions much more quickly than was the case with climate-related disclosures. Regulatory momentum has been increasing. (See Exhibit 2.) And the insurance sector, an early barometer for risk assessment, is already preparing to factor nature-related risks into its underwriting and investing activities. In 2021, roughly three-quarters of the 108 insurance sector participants from 32 countries surveyed by the Sustainable Insurance Forum considered these risks to be financially material.

Crucially, a nature strategy can do more than mitigate risks. Nature-based solutions (NbS)—actions taken to protect, manage, and restore natural and modified ecosystems—are a burgeoning area with significant pent-up demand. The World Economic Forum reports that NbS and other nature-positive policies could generate more than $10 trillion in new business value annually. Yet few financial institutions have opportunities like these on their radar, leaving significant value at stake. Funding for NbS amounts to only $154 billion per year, less than a third of the total that the UN Environmental Program says is necessary by 2030 to stop biodiversity loss and land degradation.

Financial institutions also have an immediate and practical reason to start building a nature strategy, which is to ensure that their net zero plans don’t inadvertently create harmful impacts. Investments in renewable energy infrastructure, for example, can lower the carbon emissions of their portfolios. But they also create a tension with nature, since infrastructure consumes land and impacts biodiversity. Integrating nature strategy with net zero planning can help financial institutions approach target setting and investment prioritization in a way that reduces negative nature impacts and creates opportunities for climate mitigation. For instance, studies show that over one-third of the interventions to limit the increase in global temperatures to 2°C or less will come from NbS.

Nature Planning Is a New Concept, and Its Pillars Are Evolving

Although interest in setting a broader nature-based strategy is growing, approaches remain in development. The “Global Goal for Nature” set by the Science Based Targets Network (SBTN) defines a nature-positive world as one with zero net loss of nature since 2020, a net-positive state of nature by 2030, and full recovery by 2050. But nature is multidimensional. And interpretations of how to apply SBTN’s definition vary. In the absence of standards, financial institutions must determine what “nature-positive” means for their business and stakeholders—and be transparent in articulating that position.

Gaps in data and modeling are another challenge. Financial institutions need to measure impacts and dependencies across sectors and along client supply chains. But gaining a single source of truth on metrics and sources in order to map nature impacts and dependencies is difficult, given how critical location-specific data is. For example, water use in an arid region poses very different risks to businesses and the wider community than water use in areas with high precipitation. Another challenge to in-depth analysis involves the absence of comprehensive scenarios that would help financial institutions predict the impact of future nature developments on businesses. To discern potential vulnerabilities in near-term and longer-term supplies, financial institutions need insight into the specific locations of where their clients’ suppliers are based, but they also need the ability to forecast disruptions to those supply chains in order to identify potential hotspots.

Meanwhile, measurement methodologies to assess impacts and dependencies are maturing. Launched in 2019, the Partnership for Biodiversity Accounting Financials offers financial institutions a standardized way to account for biodiversity impact, much like the work of the Partnership for Carbon Accounting Financials—but a comprehensive standard that addresses all nature dimensions will take time to crystalize. And although the SBTN has created a science-based target-setting framework for corporations, that framework hasn’t yet been adapted for financial institutions.

These growing pains are important to recognize, but they should not prevent financial institutions from developing a nature strategy. In fact, advantage will go to those that start now.

The Four Steps to Building a Nature Strategy

We have devised a simple, pragmatic, four-step framework to help institutions begin reaping the benefits of nature planning. The practices developed at each step are designed to flex and grow as the field of nature management matures, ensuring that time and investment spent today will pay continual returns.

Identify sectors with high nature exposure. As we’ve seen, nature-related exposures can trigger financial risks. Determining where these exposures sit in an institution’s portfolio requires holistic analysis of impacts and dependencies. (See Exhibit 3.) For instance, at first blush, health care companies might seem to have a lower overall environmental impact than other sectors. But closer examination reveals that they have high rates of water use, water pollution, and solid waste generation. Understanding where exposures are concentrated in a sector’s value chain is also crucial. For example, in food and agriculture, most impacts come from land use and direct exploitation, both of which are in the upstream supply chain. But in the chemicals industry, many come from pollution, which is located downstream.

In performing this analysis, rather than attempting to optimize every sector or activity, financial institutions should first focus on those that involve the greatest financing exposure. Off-the-shelf tools such as ENCORE, developed by the Natural Capital Finance Alliance, can help institutions begin to model nature-related impacts and dependencies by sector and geography. Institutions can then use in-house data to augment and refine their analyses. And while initial modeling is often qualitative, the insights gained from performing it can help establish priorities for the next phase.

Measure your nature footprint. Next, institutions need to transform qualitative insights into quantitative measures of impacts and dependencies. Doing so entails aligning on a set of metrics and selecting appropriate databases—steps that can quickly become extremely complicated, given the lack of standardization in the nature field. There are more than 300 biodiversity metrics and multiple measurement methodologies. For practical purposes, it can be useful to take a bottom-up approach, selecting metrics that consider direct drivers of nature loss such as land and water use and their impact on planetary boundaries. Working with impact drivers can help financial institutions identify which pressures are relevant to a particular business or geography, so that they can hold more meaningful discussions with clients. Alternative metrics such as mean species abundance focus directly on the state of biodiversity. Although they are helpful to consider, these broader measures are harder to link to specific client actions.

To gather information for the quantitative analysis, financial institutions can access company-reported data from third-party data providers. They can also use modeling databases such as Exiobase to estimate resource use by industry and geography. Other tools to help financial institutions quantify nature pressures across sectors and geographies are starting to emerge. (See Exhibit 4.) In addition, biodiversity footprinting tools such as Corporate Biodiversity Footprint and Global Impact Database can enable financial institutions to model different value chain elements. Still, no single solution currently supports a full value-chain assessment across nature pressures and scopes.