By Lara Alvarez
Sustainable finance is rapidly evolving into a key driver of long-term economic resilience. Lara Alvarez explains how integrating nature-related risks into financial systems enhances risk management and fosters innovation. She argues that rethinking investment strategies around natural capital is essential for unlocking sustainable growth and navigating future environmental and economic challenges.
Sustainable finance is becoming a cornerstone of efforts to achieve global growth targets. This gradual shift is gaining visibility as the pursuit of economic expansion increasingly exposes the interconnectedness between the economic and social systems that drive prosperity and the natural systems that sustain them. As the twin crises of climate change and biodiversity loss intensify, the global quest for growth is colliding with the reality of shrinking ecological boundaries. Rising and competing demand for land, water, food and minerals is unfolding in a world where natural resources are scarcer and where both the exposure and vulnerability of economic systems to the physical risks of a changing climate are rapidly increasing.
With governments and businesses under mounting pressure to deliver growth despite environmental limits, there is an urgent need for financial systems to internalise nature-related risks and support regenerative outcomes. This article explores how sustainable finance is transforming investment strategies, reshaping our understanding of financial risks and altering our perception of value. It also highlights why recognising the deep interconnection between nature and economic stability is essential to navigating the uncertain future ahead.
Natural capital as the new economic driver
The financial effects of nature-related risks are already being felt as ecosystem degradation drives up costs and disrupts business operations worldwide. As the pace and effects of biodiversity loss and resource constraints have gained visibility, regulators, investors, supply chain partners and consumers have raised the bar for corporate accountability and transparency. This shift signals an increasing recognition that economic resilience is deeply intertwined with and reliant on nature, and that nature degradation, like climate change, poses direct operational, financial, and reputational risks to corporations and financial institutions alike.
While climate considerations are already becoming mainstream in risk management and financial decisions, biodiversity is now gaining traction and is expected to reach a similar level of integration soon. Investors are increasingly demanding high-quality, consistent data to assess nature-related risk exposure and align portfolios with sustainability ambitions and goals. Moreover, planetary boundaries are being factored into decision-making and target setting, while higher consumer expectations and stricter procurement standards are pushing companies to meet more stringent benchmarks across their entire value chain.
In response to these growing expectations, a proliferation of mandatory and voluntary frameworks, such as the EU’s Corporate Sustainability Reporting Directive (CSRD), International Financial Reporting Standards (IFRS), and Taskforce on Nature-related Financial Disclosures (TNFD), is driving more detailed disclosures, which in turn heighten market expectations.
Against this backdrop, proactive identification and management of impacts and dependencies on nature, along with greater transparency, are increasingly recognised by businesses as a strategic imperative to managing risks, meeting stakeholder expectations and maintaining competitiveness. These factors are driving innovation on products, services and business models as companies realign their strategies and approach to value creation.
Forecasting risk to drive financial resilience
Biodiversity loss and ecosystem degradation exacerbate financial risks, including credit, market and liquidity risk. Examples include increased default risk from businesses in the food and beverage and agricultural sectors due to the effects of water scarcity, pollinator decline and the reduced ability of agroecosystems to regulate pests, thus leading to higher input costs and reduced crop yields. In turn, these risks could increase the price volatility of agricultural commodities, drive asset write-downs and reduce insurance access in ecologically vulnerable regions. In today’s complex global value chains, consideration of these interactions with nature and the critical hotspots is essential for a holistic understanding of the challenges businesses face, enabling the design of optimal, cost-effective solutions that deliver long-term value protection and creation.
Critically, addressing these challenges requires enhancing ESG screening to incorporate nature-related risk assessments into financial analysis, portfolio management, and investment decision-making. This integration involves understanding how businesses depend on natural ecosystems (e.g. water, soil, pollination, climate regulation) and how the direct and indirect degradation of ecosystems across the value chain can affect business performance and long-term economic resilience. Identifying the transmission channels through which these risks can materialise is crucial. This allows for the integration of environmental, operational, and financial data with forward-looking scenario analysis, enabling the design of cost-effective management strategies. By stress-testing the resilience of their portfolios, financial institutions can enhance their strategy and risk management processes, drawing on the lessons learned in the climate space.
Companies that have already developed and implemented climate risk assessment and management systems are well-positioned to begin this journey. Unlike climate risks, nature-related risks involve multi-dimensional, context-specific interactions across ecosystems that typically require granular, location-specific data and metrics. This complexity, combined with challenges in data availability, accessibility and standardisation, is slowing the finance sector’s response to the nature crisis.
However, the TNFD guidance is clear – the process is incremental. Financial institutions are encouraged to start with what they know, tailoring the approach to the sectors and geographies in their portfolio with the most material interactions with nature (e.g. high-impact activities, priority locations). Existing data (such as public or third-party datasets, operational data and disclosures) can be combined with satellite imagery and GIS systems for a more precise, spatially explicit assessment of nature-related risks. Starting with a pilot can go a long way to build internal capability and demonstrate value during this first iteration, with more detailed analysis and disclosures following at a later stage.
Beyond risk: redirecting capital for resilient growth
Whilst a necessary first step, risks and opportunity identification and management are not in themselves sufficient to navigate the challenges ahead. To sustain economic growth in the face of planetary boundaries and population growth whilst building long-term resilience, businesses must rethink their strategies towards regenerative business models that actively restore, renew and enhance natural and social systems to create net positive outcomes for people, nature and the economy.
The finance sector has the power to accelerate systemic change and help close the biodiversity finance gap. Halting and reversing biodiversity loss and restoring ecosystems requires scaling up positive incentives through the mobilisation of USD 200 billion per year from across public and private sources that invest in nature conservation and restoration. It is also essential to reduce financing for environmentally harmful, subsidy-dependent activities and to support the elimination of the estimated USD 500 billion per year in harmful subsidies to nature. Additional efforts in areas such as capacity building, technology transfer, and information and knowledge sharing are also critical to optimise resource use and drive progress.
By embedding considerations for the natural world into decision-making and exercising active ownership, the finance sector can redirect investments away from activities that harm biodiversity, scale up sustainable solutions, and accelerate the adoption of nature-positive, climate-resilient, and socially inclusive models. Leveraging finance to safeguard long-term sustainable growth has become essential. The real question for the sector is how swiftly, credibly, and strategically it can drive the systemic changes needed to navigate this transition.
About the Author
Lara Alvarez is an environmental economist with over 20 years of experience in environmental consultancy. Specialising in sustainable finance and in the use of double materiality approaches, including natural capital and climate transition frameworks.
