(Photo by LUIS ACOSTA/AFP via Getty Images)
AFP via Getty Images
In 2023, after severe droughts hit the Amazon, giant barges loaded with EU-bound commodities ran aground on a river that had disappeared beneath them. The droughts disrupted important navigation routes, forcing river transport to drop by up to 50 percent. The knock on effect saw freight tariffs double and one of Brazil’s largest water transport companies, Hidrovias do Brasil, reported over $100 million net loss in 2024 alone.
Many will have viewed this as a local climate event. But this story is not an isolated or a local case. It’s part of a growing pattern, symptomatic of a deepening crisis threatening agricultural equities, sovereign bonds, and credit quality simultaneously.
Supply chain pricing and trade finance are built on the assumption that natural systems – rivers, rainfall, soils – are stable. That assumption is not only wrong; it’s actively destroying business as we know it and undermining efforts to tackle the twin biodiversity and climate crises.
Nature and climate risks are intensifying
We have breached seven of nine planetary boundaries and extreme weather and climate-related disasters are escalating in severity, frequency, and impact. In the last few months alone, several major institutions have raised the alarm that destructive use of ecosystem resources could plunge us into another financial crisis.
The UK’s Joint Intelligence Committee assessment, drawing on analysis from MI5 and MI6, found strong consensus that ecosystem loss is a serious, direct threat to national security, capable of lowering GDP by 12 percent by 2030 and causing widespread economic disruption. The Institute and Faculty of Actuaries, respected worldwide as a global authority on financial risk, has warned withdrawals from nature have far exceeded deposits and many of our accounts are now overdrawn, risking irreversible collapse.
Last month, a new scientific paper published in Nature, exposed the cascading risks from forest loss in the Amazon. It warned two-thirds of the rainforest could flip into a savannah and a carbon source at 1.5C-1.9C of global warming, if deforestation increases to 22-28 percent. This would have far reaching impacts. A change in moisture in one area of the Amazon can impact entire regions hundreds or even thousands of kilometres away. A loss of rainfall would significantly impact trade routes, agricultural land and inequality across South America, causing price volatility that affects consumer spending economy-wide.
Spotlight on soy
New research from Zero Carbon Analytics (ZCA) has quantified the financial risks to soy trade from disruption caused by critically low river levels at two major ports in the Amazon. It estimates up to USD $1 billion in Europe-bound soy is at risk annually by 2060, due to low river levels caused by deforestation. This represents over one-third of the total USD $2.4 billion European-bound Brazilian soy transiting from these ports each year.
Major commodity traders, and the banks that provide a variety of financial services along soy supply chains, are far from safe. Cargill, the largest exporter of soy through these ports, faces up to $346 million in annual trade exposure by 2060. Amaggi and Bunge face $60.5 million and $30 million respectively.
It’s also concerning to see governments backsliding on climate finance at a time when it is needed the most. Take the UK for instance, the ZCA report finds the country faces up to $50 million in annual soy trade disruption from exposure at the two Amazon ports by mid-century, while it is simultaneously cutting climate and development aid that would reduce that exposure.
One way to address this would be through investment into the Tropical Forest Forever Facility (TFFF), which, combined with a strong, actionable Deforestation Roadmap, would incentivise shifting trade and tackle harmful financial flows. Reaching the $10 billion TFFF target would tip a groundbreaking idea into a viable investment pathway for private investors.
From fragility to stability
A dangerous assumption currently runs through most financial risk frameworks: that the natural systems underpinning economic activity will remain stable.
They won’t.
Without consistent investment into the very systems our economies depend on, ‘unanticipated shocks’, which the OBR identifies as having the most significant negative effects on the economy, are increasingly likely to be linked to the loss of natural resources.
This investment needs to be enabled via structural changes to the financial system. For example, currently it is hard for banks to incorporate forward looking assessments within their existing credit frameworks. They are aware of the challenge but face compounding barriers. This is exactly the problem we have been addressing in our work with banks, which is due to be published at the end of May.
Until we embed climate and nature risks into the financial models that govern our economies, we are overestimating the resilience of every asset, portfolio and insurance product.
And where these risks are assessed, according to our latest research at Cambridge’s Institute for Sustainability Leadership they continue to be assessed in silos – treated as discrete events, rather than compounding interlinked systems. Feedback loops between climate, nature and social risks are not modelled which leaves investors at risk and not able to capitalise on economic opportunities, such as return-generating investments in:
- Value chain finance – supporting companies to strengthen supply chain resilience
- Stewardship and active engagement – influencing corporate behaviour and public policy to address systemic risks
- Blended finance and catalytic capital – using public and philanthropic capital to de-risk transformative private investment.
The future of our financial system depends on moving beyond siloed solutions toward structural solutions that address systemic undervaluation and overstated risk.
The challenge is not a lack of capital, but rather a dangerous and systemic miscalculation of ecosystem fragility across the financial models that govern our economies.
