Glossary term
Biodiversity Risk
Subject: Sustainability and ESG, Climate Risk
Also known as: Nature-related risk, Nature loss risk
Biodiversity risk is the chance of financial or operational loss when ecosystems decline and the species, soil, water and pollination services a business relies on weaken, or when rules and markets react to that decline.
Explanation
Companies depend on nature more than their accounts show. Farms need pollinators and healthy soil, drinks makers need clean water, and builders need timber and sand. When these inputs degrade, costs rise and supply fails. That is the physical side. The transition side arises when law, lenders or customers penalise harm to nature, for example through bans on clearing forest or liability for polluted land. Reputation and litigation risk follow from the same causes. Unlike carbon, nature is local: the damage that counts sits at a particular river, forest or coastline, so data is patchy and hard to compare. Banks and investors meet the idea through the TNFD framework and in assessing borrowers in agriculture, mining and food. Cash flows at an exposed farm or mine can weaken well before any financial ratio shows it.
Example
A lender reviews a mid-sized coffee exporter. Most of its beans come from hillsides where forest clearing has reduced rainfall and local bee numbers, and yields have fallen 12% over five years. The lender adds nature loss to its credit file, asks the exporter for sourcing maps, and prices the loan with the risk of further supply shocks in mind.
Not to be confused with
- Climate Risk
- Climate risk comes from greenhouse gases and warming. Biodiversity risk comes from the loss of species and ecosystems, though the two feed each other.