The exposure of European banks to degradation of systemically important ecosystems

Through the provision of credit and other financial services, banks enable economic activities that affect the states of ecosystems and their biodiversity. Nature degradation is eroding the resilience of ecosystems that are central to human wellbeing, particularly due to climate and land use drivers. Efforts to conserve these ecosystems generate reputational and legal risks to financial institutions exposed to them and can impair the ability of underlying companies to repay their debt. Using a highly granular supervisory dataset, we examine how banks in the Euro area contribute to these dynamics by financing companies linked to negative impacts in several ‘systemically important’ ecosystems – the Amazon rainforest in Brazil, boreal forests in Canada and Russia, and mangroves and peatlands in Indonesia. This granular, location-specific approach moves beyond aggregate biodiversity footprint metrics and provides greater clarity on the channels through which high-income financial systems contribute to ecosystem loss. Our (expected) results show that European banks’ exposures to these ecosystems is primarily through company subsidiaries that would not be flagged as high impact under conventional approaches based on industry classifications. Key ecosystems linked to European banks are the Brazilian Amazon and Canadian boreal forests, with exposures to other ecosystems close to negligible. Exposures are concentrated in a small number of financial institutions headquartered in France and Belgium. Although the dataset underestimates total exposures due to limited cross-border data, individual exposures faced by most European banks are likely to be very small relative to their overall portfolios. These findings can inform supervisory assessments of banks’ management of environmental risks, and underline that a risk-based framing alone is unlikely to create sufficient incentive to redirect commercial financial flows away from activities that degrade ecosystems. Future research could draw on rapidly expanding firm-level data attributing ecosystem impacts further up the supply chain to further characterise indirect exposures.