By Arthur Lu, Global Head Environment Impairment Liability at Allianz Commercial.

Climate risk is already a well-documented issue for businesses, but the related subject of nature risk is not far behind. How concerned should companies be about nature-related exposures, and what are the main challenges they pose to business operations and reputations?

What is nature risk?

Nature risk refers to the potential negative impacts on businesses, economies, and societies that arise from degrading natural ecosystems, biodiversity loss, and the decline of ‘ecosystem services’ – the positive benefits ecosystems bring to humans. It is a growing concern as the world grapples with deforestation, water scarcity, climate change, and ecosystem collapse.

The term nature risk has gained traction in the corporate world in response to increasing environmental regulation and the realization that nature is a critical asset, rather than an ‘externality’. Historically, businesses operated under the assumption that nature was an externality, a term that refers to the unintended side effects of an activity where the effects are not reflected in the price of goods or services.

This means the environmental costs of economic production – pollution, deforestation, and resource depletion – were left out of the pricing of goods. As a result, natural resources have been exploited without fully accounting for the long-term damage to ecosystems, human health, and the economy.

Why is nature risk of interest to business?

As awareness of the value of nature has increased, societies have introduced laws to safeguard it. There is a growing expectation that businesses will be held accountable for any harm they cause, and, in severe cases, directors could even face criminal liability. For businesses, the rise of nature risk presents regulatory and reputational challenges. 

In addition to regulatory compliance, operational disruption is another significant risk for businesses. Degraded ecosystems can impact supply chains, increase resource scarcity, and lead to higher costs. Companies that rely on natural resources – such as in agriculture and mining – are particularly vulnerable.

The price tag of global crops directly relying on pollinators is estimated to be between $235bn and $577bn a year.  Companies that rely on agriculture are already feeling the strain from reduced productivity due to ecosystem degradation. Pollinator declines and land degradation are driving up operational costs and reducing output, which directly affects companies’ bottom lines.

As nature-related regulations become more stringent, businesses that act early stand to gain a competitive advantage. By staying ahead of developments in the regulatory environment, businesses can reduce their exposure to nature risks and avoid the high costs associated with non-compliance. 

Moreover, businesses that are seen as proactive in protecting ecosystems and supporting sustainability initiatives can enhance their brand reputation and attract environmentally conscious consumers and investors. This is especially critical as public awareness of environmental issues grows, and consumers increasingly demand transparency and accountability from the companies they support.

What are the trends and challenges around nature risk? 

The growing awareness of nature’s finite resources is driving changes across industries. One of the most significant trends is aligning nature risk with climate risk. Many companies have long viewed climate and nature as separate issues, but now it is clear they are interconnected. Nature degradation accelerates the climate crisis, and climate change worsens nature risks like deforestation, biodiversity loss, and ecosystem collapse.

The challenge for businesses is navigating this complex, fast-evolving regulatory landscape. In the coming years, companies heavily dependent on natural resources will face mounting costs – not just from regulatory compliance but from operational disruptions caused by resource depletion, ecosystem degradation, and shifting climate patterns.

We have already seen instances where companies have been forced to halt production or invest heavily in remediation due to environmental damage. For businesses that fail to adapt, the financial risks could include higher insurance premiums, significant capital expenditure for environmental recovery, and the potential for long-term reputational damage, which can erode market value and investor confidence.

Modeling and pricing nature-related risks present unique challenges for insurers due to the complexity and unpredictability of ecosystem degradation. One of the most significant challenges is the limited historical data on nature risks. Unlike traditional risks, which can be more easily quantified, the gradual degradation of ecosystems and biodiversity loss make it difficult to predict the monetary impact accurately.

For example, while insurers can model acute events like floods or fires, long-term issues such as soil erosion or species decline are more complex to measure. This creates a challenge for insurers in accurately pricing nature-related risks and developing appropriate coverage solutions. Insurers must also adapt to the increasing frequency and intensity of environmental events caused by climate change.

The complexity of these challenges underscores the need for collaboration between businesses and insurers to develop innovative risk management solutions. By offering specialized insurance products like environmental liability and contractors’ pollution liability, insurers can help clients navigate the complexities of environmental regulations and mitigate the monetary impact of nature-related liabilities.