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

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