Evidence Review on the Financial Effects of Nature-Related Risks

In line with the expectations of investors, regulators, standard setters and policy-makers, and in response to the Taskforce on Nature-related Financial Disclosures (TNFD) recommendations, corporates and financial institutions are beginning to understand how nature-related risks and opportunities emerge from their dependencies and impacts on nature. This calls for an integrated approach to identify, assess and manage material nature- related dependencies, impacts, risks and opportunities. Despite growing recognition, nature-related risks remain underrepresented in corporate reporting, and their financial implications are poorly quantified. We investigate how nature-related risks can lead to material financial effects on corporates and financial institutions. Although clear linkages exist, nature-related issues are frequently not considered financially material in corporate reports, especially from a single materiality perspective. Additionally, despite being a critical pathway to potential risk affecting the financial prospects of a business, dependencies on nature remain poorly understood and typically underexplored. Many companies continue to struggle to implement robust risk assessment methods, particularly with assessing the financial implications of these risks. We demonstrate how nature-related risks may affect an entity’s cash flows, cost of capital and access to capital over different time horizons, and thus influence investor decisions and capital allocation. We synthesize evidence from a database of over 600 entries across 360 sources, complemented by corporate interviews and stakeholder consultations. The evidence of financial effects of nature-related risks for businesses and the economy is extensive. The evidence spans sectors, scales, hazards, time horizons and types of effect, with high-quality analysis across evidence types. In particular, through water scarcity, liability risk, reputational risk and policy risk. However, full causal chains (from dependencies and impacts to financial effects) are rarely fully mapped, with transmission channels remaining underexplored. Interviews and disclosure reports reveal evidence to demonstrate that information on nature-related risks is important to investors and that omitting, misstating or obscuring such information could reasonably be expected to influence investors’ decisions.