Europe economy relies deeply on natural ecosystems forests that filter water, wetlands that buffer floods, soils that grow crops, and oceans that store carbon. But the very foundation of that natural wealth is under increasing strain, with consequences now rippling through the financial system.
According to new research by the European Central Bank (ECB), working with the University of Oxford’s Resilient Planet Finance Lab, 72% of firms in the euro area are critically dependent on natural ecosystem services. These same companies account for roughly three-quarters of all corporate bank loans in the region, meaning that environmental stress is not just an ecological issue it’s a risk to financial stability.
The study introduces a new tool: the Nature Value at Risk (NVaR) framework. This model links the health of ecosystems to sector-specific economic output and financial exposure. It uses a combination of earth observation data, satellite inputs, modelled hazards, and firm-level economic dependencies to trace how environmental degradation could cascade through economies.
The most immediate and significant threat identified is surface water scarcity. If a severe drought likely once every 25 years hits the eurozone, nearly 15% of the region’s economic output could be at risk. The risk is most severe in southern Europe but is spreading northward, affecting agriculture, manufacturing, utilities, and even hospitality.
Water scarcity doesn’t just affect farms. Dry soils mean lower crop yields. Industrial operations become more expensive or are forced to halt when water is unavailable. Inland shipping and hydroelectric power also suffer, as river levels fall too low to support safe transit or energy generation. In places like Spain, Italy, and Greece, up to 30% of agricultural output is at risk, with countries like Germany and Finland seeing impacts too though at lower levels.
Beyond this, over €1.3 trillion in bank loans are exposed to sectors facing high water stress. Manufacturing, real estate, energy production, and construction are among the most vulnerable. If companies fail to maintain production due to water constraints, they may default on their loans posing a systemic risk to the banking sector itself.
Groundwater pollution and over-extraction further compound the problem, as do shrinking floodplains and deteriorating water quality. Poor water quality has already driven a sharp decline in recreational tourism across parts of Europe, costing over €100 billion annually.
The ECB emphasizes that these nature-related risks are not yet fully captured by conventional financial risk models. Most current analyses focus narrowly on individual firm dependencies. In contrast, the NVaR framework maps how disruption to one ecosystem service such as river water can cascade through supply chains, hit multiple sectors, and threaten both economies and banks.
The research also points to the need for stronger collaboration between finance and science. Climate extremes, land degradation, invasive species, and pollution are all eroding the ecosystems that the economy quietly depends on. These impacts come in two forms: slow, long-term degradation and sudden, acute shocks like droughts and floods many of which are amplified by climate change.
Later this year, the ECB will publish more detailed results. But the early message is clear: environmental degradation is no longer a peripheral issue for central banks and financial institutions. Nature loss now poses systemic risks that must be embedded into the core of economic and risk assessment frameworks.
If banks and regulators fail to act, climate-related shocks could be compounded by a deeper crisis: the collapse of the very natural systems that support our economies. The time to integrate nature into finance is now.