European Central Bank previews nature-risk indicators and finds surface water scarcity could put almost 15% of euro area output at risk

In a keynote speech, European Central Bank Executive Board member and Supervisory Board Vice-Chair Frank Elderson set out how the ECB is building its capacity to measure ecosystem services and identify nature-related financial risks relevant to monetary policy and banking supervision. He previewed preliminary results from joint work with the Resilient Planet Finance Lab at the University of Oxford to develop systemic risk indicators linking ecosystem degradation to economic and financial vulnerabilities, identifying water-related risks as the most significant for the euro area. The ECB’s emerging approach moves beyond “dependency analysis” to estimate how much industry gross value added is at risk when ecosystem services degrade. Elderson highlighted initial findings that surface water scarcity alone could put almost 15% of euro area economic output at risk, with agriculture the most exposed sector, while other sectors also face material impacts. He also cited research indicating that more than 34% of banks’ total outstanding nominal amount, over €1.3 trillion, is extended to sectors exposed to high water scarcity risk. The speech reiterated the ECB’s supervisory focus on ensuring large euro area banks adequately manage both climate-related and nature-related risks, and noted the importance of reliable and comparable corporate sustainability data, warning that excluding too many firms from the Corporate Sustainability Reporting Directive could reduce the data available to assess climate and nature-related financial risks. A blog post with preliminary results is due on 23 May 2025. The ECB plans to publish further analysis later in 2025 examining changes in probabilities of default in the most affected sectors, framed as stress-testing banks’ credit portfolios to nature degradation.