Biodiversity and Finance : A Preliminary Assessment of Physical Risks for the Banking Sector in Emerging Markets

Economic activity depends on a flourishing biodiversity and intact environment through the provision of ecosystem services. The depletion of these services poses physical risks for the financial sector. This paper attempts to measure the potential exposure of the banking systems in 20 emerging markets to nature loss through their lending portfolio. The results show that banks in emerging markets allocate around half of their credit portfolio to firms whose business processes are highly or very highly dependent on one or more ecosystem services. The results also provide initial and preliminary evidence that points to a negative correlation between country income level and dependency on ecosystem services. Accounting for indirect dependencies on ecosystem services via supply chains and trade could change this observed relationship, however. Furthermore, the highest dependencies on ecosystem services across countries tend to be on climate regulation and flood and storm protection, indicating the interconnectedness of climate change and nature loss