SENNA

Investors Must Start Pricing Ecosystem Resilience, Experts Warn

London - Investors are being urged to start factoring the resilience of natural ecosystems into their asset pricing models, as climate-driven water shocks increasingly disrupt businesses and supply chains worldwide.

According to new analysis, the UK has the highest share of its population and GDP exposed to flooding of any country in Europe - a stark indicator of how deeply the nation's economic performance depends on functioning natural systems. Yet most financial institutions are still underestimating their exposure to water-related physical risks, experts say.

"Nature is not a thematic add-on. It is business-critical infrastructure, and as we continue to degrade it, it becomes the most fragile infrastructure we have," said Rob Gardner, CEO and co-founder of Rebalance Earth.

Across the UK and globally, climate and nature-driven water shocks - including flooding, drought, and water contamination - are no longer episodic environmental events, but are causing cascading business disruptions, infrastructure failures, and supply chain breakdowns. The financial impacts are immediate, compounding, and system-wide, according to the analysis.

Modeling by Scottish Widows shows that water-related physical risks can materially erode equity and credit metrics across multiple sectors. "Yet disclosure data from CDP shows that most financial institutions still underestimate their exposure to water risk, even though water is the first point where climate and nature collide," Gardner said.

While investors have become adept at understanding climate transition and physical risks, nature-related risks have not undergone the same evolution in strategic asset allocation and portfolio construction, experts warn. This disconnect leaves many portfolios exposed to potentially severe disruptions.

"A shift is underway to turn nature resilience into predictable, infrastructure-style cashflows," Gardner said. "Investors who can get ahead of this trend and start pricing ecosystem resilience will be best positioned to navigate the growing physical risks to their holdings."

The warning comes as policymakers and regulators ramp up pressure on the financial sector to address nature-related risks. The UK government, for instance, has proposed mandatory climate and nature-related financial disclosures for large companies and financial institutions.

Experts say that developing robust models to quantify nature-related risks and opportunities will be crucial for investors seeking to future-proof their portfolios against the growing threats to natural capital. Those who can effectively price in ecosystem resilience may gain a competitive edge in the years ahead.