Understanding the double materiality of nature-related financial risks: evidence from the Mexican economy

Understanding the links between ecology and finance is a difficult task, as they are mediated by finance’s interaction with productive sectors and by the latter interacting with nature. An emerging concept useful here is the ‘double materiality,’ used to describe how economic activity interacts with nature, both depending on it and affecting it. Nature-related financial risks are commonly classified into physical, transition, and systemic risks, while the concept of double materiality captures the two-way relationship between economic activity and nature through dependencies on ecosystem services and impacts on ecosystems. This paper analyzes the double materiality of nature for the Mexican economy by combining a 263-sector input-output model with the ENCORE database, which features ‘generic’ scores of direct sectoral dependence on 25 ecosystem services and impact in 13 environmental categories. We construct ‘total’ dependence and impact scores capturing their diffusion throughout the economy’s network of supply chains, and relate them to macroeconomic data and the national credit portfolio. We find that 48-66% of output, 47-53% of jobs, and 68-83% of credit are highly dependent on at least one ecosystem service, where the pair of values indicates direct and total effects, respectively. Similarly, 49-66% of output, 33-49% of jobs, and 54-68% of credit are highly harmful in at least one category of environmental impact. We go beyond ENCORE’s generic assessments by studying water-related physical risks and land-related transition risks with an implementation of environmentally-extended input output and by assuming fulfillment of Mexico’s commitments under Target 2 of the Kunming-Montreal Global Biodiversity Framework, respectively. We finally assess the limitations of our methods and procedures, and suggest policy measures promoting a better understanding of nature-related financial risks.