How nature affects financial risk and company and investor performance

Overview

The complex interplay of nature-related dependencies and impacts over multiple time periods can result in earning and cashflow vulnerability. This can transmit into a broader range of financial risks, including market, credit and liquidity risks. These transmission channels include both micro-channels (such as supply chain uncertainty due to disruptions to production activities and value chains imposing unexpected costs; changes in profitability and asset values; and increased litigation) and macro-channels (such as changing demand and raw material price volatility).

The complex interplay of nature-related dependencies and impacts over multiple time periods can result in earning and cashflow vulnerability. This can transmit into a broader range of financial risks, including market, credit and liquidity risks.

This in turn gives rise to risks and opportunities. Business action to manage these issues – through, for example, governance, strategy, and risk management – can give rise to financial opportunities or risks linked to, for example, asset devaluation, supply chain resilience and shifting demands. These risks within organisations translate into financial risk for financial institutions. But not all nature-related risks and opportunities can be translated into ‘financial impact’ in the form that is recognised within income statements, cash flow statements or balance sheets.

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