The European Central Bank published an Occasional Paper assessing how degradation of ecosystem services could transmit to euro area economic activity, price stability and financial stability. Using a nature value-at-risk framework to link biophysical shocks to sectoral output and bank loan portfolios, alongside a complementary “endogenous risk” analysis of feedback loops from financed impacts, the paper identifies water-related ecosystem services as the most material risk channel. The analysis finds that about 72% of euro area non-financial corporations (around three million firms), representing nearly 75% of corporate bank lending, are highly dependent on at least one ecosystem service, and that around half of estimated nature-related risk originates outside the euro area via international supply chains. A high-resolution deep dive into water risks estimates that, under a drought event with a 100-year return period, surface-water scarcity could expose about 24% of euro area output to risk (up from about 9% using country-level inputs), with groundwater scarcity affecting up to 30% and degraded water quality up to 19%. Mapping results to AnaCredit data (EUR 4.4 trillion of loans) indicates around 19% of loans are exposed to surface-water scarcity and 22% to groundwater scarcity (not additive), while 12% are linked to degraded water quality, with the largest affected exposures in real estate, manufacturing, wholesale and retail trade, mining and construction. The endogenous-risk assessment also points to water as the dominant feedback channel, with manufacturing accounting for the largest share of overlap between ecosystem-service dependency and financed ecosystem degradation. The paper highlights data and methodological constraints and sets out priorities for further work, including enhancing the modelling framework, improving nature-related data and firm-level disclosures, developing forward-looking scenarios, and progressing towards a nature-related stress test for euro area banks.
European Central Bank 2025-12-02
European Central Bank research estimates surface-water scarcity could put up to 24% of euro area output and 19% of bank loans at risk
The European Central Bank's Occasional Paper assesses ecosystem service degradation's impact on euro area economic activity, price stability, and financial stability, highlighting water-related services as the primary risk channel. It reveals 72% of euro area non-financial corporations are highly dependent on ecosystem services, with significant exposure to water scarcity risks affecting corporate bank lending. The paper urges improved data, modelling, and firm-level disclosures to enhance nature-related stress testing for euro area banks.