Financial peril is inherently linked to environmental risks
In the face of ecological instability, long-term asset owners such as pension funds and sovereign wealth managers are proactively addressing nature-related financial risks. These risks, which include stranded agricultural assets and declining sovereign-credit ratings in climate-vulnerable economies, are increasingly being confronted by investors.
The approach taken by these asset owners is multi-faceted. They are treating nature loss and climate change as core financial risks, urging trustees to challenge advisers and asset managers on how these risks affect portfolio performance. This shift towards systemic risk management that includes environmental factors is a significant step forward.
Leading sovereign wealth funds, such as Norway’s Public Pension Fund Global, are assessing up to 96% of their portfolios for nature-related risks. They are applying major institutional changes beyond standard ESG measures to integrate natural capital considerations across investments.
Finland’s state pension fund is exploring ways to quantify how nature-related risks affect long-term pension liabilities. Meanwhile, Temasek Holdings in Singapore is using satellite monitoring and biodiversity data to evaluate risks and opportunities related to natural capital, demonstrating innovation in risk identification and opportunity spotting.
Institutions are also encouraged to align with evolving regulatory and risk-assessment efforts. The Financial Stability Board (FSB) and Network for Greening the Financial System (NGFS) are developing principle-based risk frameworks, supervisory tools, and disclosure standards to help financial institutions incorporate nature-related risks.
Despite political headwinds surrounding ESG investing, institutional investors are significantly increasing allocations to nature-based investments. They are motivated by financial returns and risk mitigation tied to nature dependency for economic resilience.
Asset managers have also strengthened their ESG and nature-related policies. More firms are committing to stewardship codes and net zero plans, and they are focusing on better environmental and social disclosures to enhance transparency and risk management in portfolios.
However, the risks of nature and climate crisis have not been adequately priced into financial models. The International Monetary Fund recognizes that nature and climate risks will materialize in near- and medium-term shocks. In light of this, it is the responsibility of asset owners, central banks, and institutions like the IMF to integrate this recognition into all their activities.
The Taskforce on Nature-related Financial Disclosures (TNFD) has devised a set of disclosure recommendations and guidance for businesses and financial institutions to integrate nature into their decision-making. This is a crucial step towards ensuring that investors no longer need to operate blind regarding nature risks, as new biodata technology is available to help them act.
Some central banks have developed integrated scenario models to assess the impact of climate- and nature-related risks on the economy and financial system. In 2022, we saw examples of these risks materializing in real-world scenarios. Floods in Pakistan devastated agriculture, employing 40% of the workforce, and drove up food prices, pushing the country to the brink of default. Rising temperatures and erratic rainfall have slashed coffee yields in Brazil and Ethiopia, causing global prices to spike and undermining rural incomes and export revenues. In Indonesia, deforestation and peatland degradation from unsustainable palm-oil production led to a temporary export ban in 2022.
As we move forward, it is clear that institutions that lead will be those willing to move beyond silos, align capital with planetary boundaries, and invest not only in markets but also in the systems that support them. Julie McCarthy, CEO of NatureFinance, and Patrick Odier, Chair of Building Bridges and Chair of the Supervisory Board of Lombard Odier Group, are among those leading the charge. Rapid planetary warming and environmental degradation threaten the global economy, and it is the responsibility of all to address these risks systematically.
- Long-term asset owners, such as pension funds and sovereign wealth managers, are treating carbon emissions, deforestation, and biodiversity loss as core financial risks that could affect their portfolio performance.
- Leading sovereign wealth funds, including Norway’s Public Pension Fund Global, are assessing up to 96% of their portfolios for nature-related risks and applying major institutional changes to integrate natural capital considerations across investments.
- Finland’s state pension fund is quantifying how nature-related risks affect long-term pension liabilities, while Temasek Holdings in Singapore is using satellite monitoring and biodiversity data to evaluate risks and opportunities related to natural capital.
- Institutions are encouraged to align with evolving regulatory and risk-assessment efforts, such as the principle-based risk frameworks and disclosure standards developed by the Financial Stability Board (FSB) and Network for Greening the Financial System (NGFS).
- Asset managers are strengthening their ESG and nature-related policies, committing to stewardship codes, net zero plans, and improving environmental and social disclosures to enhance transparency and risk management in portfolios.
- Some central banks have developed integrated scenario models to assess the impact of climate- and nature-related risks on the economy and financial system, and the Taskforce on Nature-related Financial Disclosures (TNFD) has devised a set of disclosure recommendations for businesses and financial institutions to integrate nature into their decision-making.
