Biodiversity, economics and finance: Understanding macro-financial risks associated with biodiversity loss

The erosion of natural capital combined with the collapse of ecosystems entails potentially far-reaching economic and financial implications, including risks for macroeconomic and financial stability of key institutions, countries and regions. The decline of ecosystem services poses physical risks for economic and financial actors that depend upon those services, while socioeconomic transformations could trigger transition risks. As more than half of the world's GDP relies on nature[[ Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy | World Economic Forum (weforum.org).]], it is estimated that the risks triggered by ecosystem degradation to human societies could be at least as high as those imposed by climate change. Furthermore, these risks are growing as biodiversity is declining at unprecedented rates in human history, which calls for improved understanding, assessment and risk management approaches by key economic actors such as corporates, governments, central banks and financial supervisors. However, a wide range of challenges, including the complexity of ecosystem processes, uncertainty about tipping points and valuation problems, make it very difficult.

Actions should improve the state-of-art knowledge on the relationships between biodiversity, economy and the financial system including better understanding of the nature and degree of risks associated to biodiversity loss, how these risks interact with each other and are likely to evolve over time.

In particular, actions are expected to:

• Expand the evidence base on the dependence of the EU economy and its financial sector on nature, including by producing relevant macroeconomic indicators, e.g. assessing the share of the EU GDP and employment that depends on nature and evaluate implications of biodiversity loss. As much as possible, research should also extend to country level analysis and/or prepare the ground for future more in-depth studies with increased geographical resolution.
• Develop scenarios tailored to financial risk assessment, including identification of assets under highest risk from being stranded and sectors that represent the highest risk exposure.
• Co-design principles for a more comprehensive and more robust environmental risk management in the financial sector, develop innovative methodologies and tools to support risk assessment that can better capture the specificities of nature and ecosystems.
• Explore tools to assess the alignment of corporates and financial institutions with major European and global biodiversity-related goals, including by leveraging of the EU Taxonomy on Sustainable Finance.
• Investigate how biodiversity loss interacts with climate change and other socio-environmental challenges in regard of macro-financial stability and how different risks can reinforce each other.
• Identify possible response options and issue recommendations for EU institutions and Member States, investors, companies and other financial market participants about macro-financial risks of biodiversity loss.

In their research, actions should investigate various possible risk categories including both physical and transition ones, their transmission channels and cascading effects through sectors and supply chains, as well as adaptive capacity of economic and financial agents/institutions, with particular focus on the EU, its Member States and Horizon Europe Associated Countries. The analysis should extend to worst-case scenarios and include low-probability but high-impact biodiversity-related tail risks.

Actions should build on and/or establish synergies with the relevant work by initiatives/projects/studies including, but not limited to, the World Economic Forum’s New Nature Economy Report Series[[ https://www.weforum.org/reports/new-nature-economy-report-series]], Network for Greening the Financial System[[ https://www.ngfs.net/en]], Taskforce on Nature-related Financial Disclosures[[ https://tnfd.global/]], The Finance for Biodiversity (F4B) initiative Accounting for ecosystems and their services in the European Union (INCA)[[ https://ec.europa.eu/eurostat/documents/7870049/12943935/KS-FT-20-002-EN-N.pdf/de44610d-79e5-010a-5675-14fc4d8527d9?t=1624528835061]] and EU Member States (MAIA)[[ https://maiaportal.eu/about]] projects, Indebted to Nature report[[https://www.dnb.nl/en/general-news/2020/indebted-to-nature/]] and the working paper ‘A “Silent Spring” for the Financial System? Exploring Biodiversity-Related Financial Risks in France’[[ https://publications.banque-france.fr/en/silent-spring-financial-system-exploring-biodiversity-related-financial-risks-france]].

Actions are expected to involve and co-create with the end-users (financial institutions, non-financial corporations, governments etc.) to fully account for their respective views and needs. Actions should bring together from the start multiple types of scientific expertise in social sciences and humanities, in particular in economics and finance, as well as scientific expertise in biodiversity and natural capital.

Actions should envisage clustering activities with projects funded under this topic as well as with other relevant Horizon Europe and Horizon 2020 projects working on links between biodiversity and sustainable finance and economics of biodiversity[[ Notably Horizon Europe projects Invest4Nature and projects resulting from the calls: “H HORIZON-CL6-2023-BIODIV-01-10: Build up of knowledge on Nature Positive Economy and supporting its scale-up”.]]. To this end proposals should foresee dedicated tasks and appropriate resources for coordination measures, joint activities, and joint deliverables.