Researchers from the Environmental Change Institute (ECI) have played a key role in a major study with the European Central Bank (ECB) showing how damage to nature could affect the euro area economy and financial system.
Dr Mark Jwaideh, Dr Jimena Alvarez and Dr Juan Sabuco, worked with a team from the University of Oxford, the London School of Economics (LSE), the University of Minnesota, and the ECB. Together, they developed the Nature Value-at-Risk (NVaR) framework, which measures the financial and economic risks of water shortages, biodiversity loss, and other ecosystem problems.
The report finds that water-related risks alone, including surface- and groundwater shortages, could threaten up to 24% of economic output in the euro area. It also shows that banks can unintentionally increase these risks through their lending, highlighting the importance of understanding the two-way relationship between finance and nature.
The researchers say understanding these links is crucial as nature is not just an environmental issue, but a financial one too.
Dr Jwaideh, Research Associate at ECI and also LSE, led on Oxford’s contribution. He said:
One of the key insights from this work is that nature-related risks are highly spatially uneven. Water scarcity or ecosystem degradation in one region can have disproportionate impacts on specific sectors, firms, and ultimately financial portfolios.
This means that aggregated or national-level assessments can mask material risks. To manage nature-related financial risk effectively, banks and policymakers need granular, location-specific analysis that captures where economic activity is actually exposed and how those exposures propagate through supply chains.”
The study sets a new standard for how central banks can include nature-related risks in their decisions, helping build a more resilient economy.
Read the full ECB report: Nature at risk: Implications for the euro area economy and financial stability
Read more insights from the report’s authors on LinkedIn