IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbops/2023333.html
   My bibliography  Save this paper

Living in a world of disappearing nature: physical risk and the implications for financial stability

Author

Listed:
  • Lelli, Chiara
  • Parisi, Laura
  • Heemskerk, Irene
  • Boldrini, Simone
  • Ceglar, Andrej

Abstract

The loss of biodiversity and the degradation of natural ecosystems pose a significant threat to the broader economy and financial stability that central banks and financial supervisors cannot ignore. To gain further insights into the implications of nature and ecosystem service degradation for financial stability, this study assesses the dependencies of euro area non-financial corporations and banks on different ecosystem services. The study then develops a method to capture banks’ credit portfolio sensitivity to possible future changes in the provision of ecosystem services. Our results show that 75% of all corporate loan exposures in the euro area have a strong dependency on at least one ecosystem service. We also find that loan portfolios may be significantly affected if nature degradation continues its current trend, with greater vulnerabilities concentrated in certain regions and economic sectors. JEL Classification: C55, G21, G38, Q5

Suggested Citation

  • Lelli, Chiara & Parisi, Laura & Heemskerk, Irene & Boldrini, Simone & Ceglar, Andrej, 2023. "Living in a world of disappearing nature: physical risk and the implications for financial stability," Occasional Paper Series 333, European Central Bank.
    • Handle: RePEc:ecb:ecbops:2023333
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpops/ecb.op333~1b97e436be.en.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Konstantin Stadler & Richard Wood & Tatyana Bulavskaya & Carl†Johan Södersten & Moana Simas & Sarah Schmidt & Arkaitz Usubiaga & José Acosta†Fernández & Jeroen Kuenen & Martin Bruckner & Stefan, 2018. "EXIOBASE 3: Developing a Time Series of Detailed Environmentally Extended Multi†Regional Input†Output Tables," Journal of Industrial Ecology, Yale University, vol. 22(3), pages 502-515, June.
    2. Stefano Battiston & Antoine Mandel & Irene Monasterolo & Franziska Schütze & Gabriele Visentin, 2017. "A climate stress-test of the financial system," Nature Climate Change, Nature, vol. 7(4), pages 283-288, April.
    3. Costanza, Robert & de Groot, Rudolf & Braat, Leon & Kubiszewski, Ida & Fioramonti, Lorenzo & Sutton, Paul & Farber, Steve & Grasso, Monica, 2017. "Twenty years of ecosystem services: How far have we come and how far do we still need to go?," Ecosystem Services, Elsevier, vol. 28(PA), pages 1-16.
    4. Unai Pascual & Patricia Balvanera & Christopher B. Anderson & Rebecca Chaplin-Kramer & Michael Christie & David González-Jiménez & Adrian Martin & Christopher M. Raymond & Mette Termansen & Arild Vatn, 2023. "Diverse values of nature for sustainability," Nature, Nature, vol. 620(7975), pages 813-823, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ceglar, Andrej & Boldrini, Simone & Lelli, Chiara & Parisi, Laura & Heemskerk, Irene, 2023. "The impact of the euro area economy and banks on biodiversity," Occasional Paper Series 335, European Central Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Popescu, Ioana-Stefania & Gibon, Thomas & Hitaj, Claudia & Rubin, Mirco & Benetto, Enrico, 2023. "Are SRI funds financing carbon emissions? An input-output life cycle assessment of investment funds," Ecological Economics, Elsevier, vol. 212(C).
    2. Cahen-Fourot, Louison & Campiglio, Emanuele & Godin, Antoine & Kemp-Benedict, Eric & Trsek, Stefan, 2021. "Capital stranding cascades: The impact of decarbonisation on productive asset utilisation," Energy Economics, Elsevier, vol. 103(C).
    3. Aryal, Kishor & Maraseni, Tek & Apan, Armando, 2023. "Examining policy−institution−program (PIP) responses against the drivers of ecosystem dynamics. A chronological review (1960–2020) from Nepal," Land Use Policy, Elsevier, vol. 132(C).
    4. Francesco Bandarin & Enrico Ciciotti & Marco Cremaschi & Giovanna Madera & Paolo Perulli & Diana Shendrikova, 2020. "Which Future for Cities after COVID-19 An international Survey," Reports, Fondazione Eni Enrico Mattei, October.
    5. Lane, Philip R., 2019. "Climate Change and the Irish Financial System," Economic Letters 1/EL/19, Central Bank of Ireland.
    6. Simon Dikau & Nick Robins & Matthias Täger, 2019. "Building a sustainable financial system: the state of practice and future priorities," Financial Stability Review, Banco de España, issue NOV.
    7. van der Hoff, Richard & Nascimento, Nathália & Fabrício-Neto, Ailton & Jaramillo-Giraldo, Carolina & Ambrosio, Geanderson & Arieira, Julia & Afonso Nobre, Carlos & Rajão, Raoni, 2022. "Policy-oriented ecosystem services research on tropical forests in South America: A systematic literature review," Ecosystem Services, Elsevier, vol. 56(C).
    8. Joel C. Creed & Laura Sol Aranda & Júlia Gomes de Sousa & Caio Barros Brito do Bem & Beatriz Sant’Anna Vasconcelos Marafiga Dutra & Marianna Lanari & Virgínia Eduarda de Sousa & Karine M. Magalhães & , 2023. "A Synthesis of Provision and Impact in Seagrass Ecosystem Services in the Brazilian Southwest Atlantic," Sustainability, MDPI, vol. 15(20), pages 1-19, October.
    9. Agarwala, Matthew & Burke, Matt & Klusak, Patrycja & Mohaddes, Kamiar & Volz, Ulrich & Zenghelis, Dimitri, 2021. "Climate Change And Fiscal Sustainability: Risks And Opportunities," National Institute Economic Review, National Institute of Economic and Social Research, vol. 258, pages 28-46, November.
    10. Osbat, Chiara & Conflitti, Cristina & Eiglsperger, Martin & Goldhammer, Bernhard & Kuik, Friderike & Menz, Jan-Oliver & Rumler, Fabio & Moreno, Marta Saez & Segers, Lina & Wieland, Elisabeth & Bellocc, 2023. "Measuring inflation with heterogeneous preferences, taste shifts and product innovation: methodological challenges and evidence from microdata," Occasional Paper Series 323, European Central Bank.
    11. Moliterni, Fabio, 2018. "Do Global Financial Markets Capitalise Sustainability? Evidence of a Quick Reversal," SAS: Society and Sustainability 274853, Fondazione Eni Enrico Mattei (FEEM).
    12. Nicolás Ruiz, Néstor & Suárez Alonso, María Luisa & Vidal-Abarca, María Rosario, 2021. "Contributions of dry rivers to human well-being: A global review for future research," Ecosystem Services, Elsevier, vol. 50(C).
    13. Irene Monasterolo & Monica Billio & Stefano Battiston, 2020. "The importance of compound risk in the nexus of COVID-19, climate change and finance," Working Papers 2020:15, Department of Economics, University of Venice "Ca' Foscari".
    14. Xiaoyu Li & Shudan Gong & Qingdong Shi & Yuan Fang, 2023. "A Review of Ecosystem Services Based on Bibliometric Analysis: Progress, Challenges, and Future Directions," Sustainability, MDPI, vol. 15(23), pages 1-18, November.
    15. Fernández-Amador, Octavio & Francois, Joseph F. & Oberdabernig, Doris A. & Tomberger, Patrick, 2023. "Energy footprints and the international trade network: A new dataset. Is the European Union doing it better?," Ecological Economics, Elsevier, vol. 204(PA).
    16. Trinks, Arjan & Mulder, Machiel & Scholtens, Bert, 2020. "An Efficiency Perspective on Carbon Emissions and Financial Performance," Ecological Economics, Elsevier, vol. 175(C).
    17. Dai, Xuhuan & Li, Bo & Zheng, Hua & Yang, Yanzheng & Yang, Zihan & Peng, Chenchen, 2023. "Can sedentarization decrease the dependence of pastoral livelihoods on ecosystem services?," Ecological Economics, Elsevier, vol. 203(C).
    18. Stede, Jan & Pauliuk, Stefan & Hardadi, Gilang & Neuhoff, Karsten, 2021. "Carbon pricing of basic materials: Incentives and risks for the value chain and consumers," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 189.
    19. Gouriéroux, C. & Monfort, A. & Renne, J.-P., 2022. "Required Capital for Long-Run Risks," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    20. Wei Jiang & Rainer Marggraf, 2021. "Making Intangibles Tangible: Identifying Manifestations of Cultural Ecosystem Services in a Cultural Landscape," Land, MDPI, vol. 11(1), pages 1-14, December.

    More about this item

    Keywords

    biodiversity loss; economy; ENCORE; impact; input-output table; materiality score; nature degradation; nexus;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbops:2023333. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.