Across the world, central banks and other institutions are increasing their efforts to build an environmentally resilient financial sector. To succeed in this, they will need to develop an understanding of the complex ways in which nature mediates interactions between finance and productive sectors. Mexico, as a megadiverse country, provides a compelling case study of the relationship between financed activities and ecosystem services.
This working paper analyses nature-related financial risks in the Mexican economy by exploring the two-way relationship between economic activities and nature, sometimes referred to as ‘double materiality’. The authors assess financed activities’ dependence on ecosystem services and impacts on nature to identify sources of economic exposure to nature-related physical and transition risks.
Key points for decision-makers
- The concept of double materiality describes how economic sectors depend on ecosystem services while simultaneously affecting ecological systems through their environmental impacts.
- While high levels of biodiversity increase the likelihood that ecosystem services will play an important role in production and livelihoods, the degree of interdependence between financed activities and these services depends on the structure of the economy.
- The effects of ecosystem degradation and policies to reverse it can cascade through value chains to sectors far removed from the original source of environmental pressure.
- Therefore, biodiversity loss should not be viewed solely as an environmental concern but also as a potential source of economic and financial vulnerability.
- Financial regulations should seek to minimise exposure to environmentally harmful activities and help conserve ecosystems that are crucial to the allocation of credit now and in the future.
- Mexico’s 2023 Sustainability Taxonomy for the financial system should help the country achieve these goals.
- A natural next step would be to develop the taxonomy further using economy-wide assessments of double materiality.
- Mexico should also build capacity for scenario analysis that focuses on physical and transition risks, and the diffusion of such risks through supply chains.