(Bloomberg) -- Banks in the UK may be facing significant losses in the coming years as the value of their assets is eroded by nature-related shocks such as water scarcity and pollution.

That’s according to a study published by the Green Finance Institute, which found that the failure to address such risks has the potential to shave about 5% off the value of UK bank portfolios amid a broader 12% economic decline through 2030.

“These risks are very material, both to the economy and to the financial system,” Nicola Ranger, director for greening finance at the University of Oxford and a co-author of the report, said in an interview. But it remains a “big blind spot” in prudential risk management, she said. 

The UK, which is still struggling to contain the toxic fallout of widespread and recurring sewage spills by privatized water utilities, is one of the most nature-depleted countries in the world, according to an analysis by a group of more than 60 organizations. Around three-quarters of the country currently suffers from a high level of ecosystem degradation, the United Nations Environment Program has found.

Britain was one of almost 200 governments that signed a 2022 agreement to halt and reverse nature loss, known as the Kunming-Montreal Global Biodiversity Framework. Signatories commit to protecting 30% of their land and sea by 2030, as well as putting pressure on financial institutions to assess and disclose their risks, dependencies and impacts on biodiversity.

The financial consequence of ignoring such risks may be huge. Green Finance Institute estimates that losses may ultimately exceed those of the financial crisis of 2008 and rival the broader economic setback suffered as a result of the Covid-19 pandemic.

A number of central banks have explored how economic outcomes depend on nature, but the GFI study marks the first time researchers have attempted to quantify the cost of environmental breakdown to both the economy and financial institutions, according to its authors.

It’s “vital work in the drive to begin to mobilize the financial flows needed to protect and restore nature,” said Abigail Herron, global head of health and nature policy at Aviva Investors.

The study analyzed financial risks arising from issues like soil health decline, water shortages and so-called zoonotic diseases, or those that spread between animals and people. GFI also looked at the financial impact of litigation risks that may stem from failure to address such threats, as well the transition risk associated with failing to keep up with socio-economic change. The researchers singled out agriculture, utilities and manufacturing as the three sectors most exposed to nature-related risk in the UK.

“Continued degradation of nature can lock in future risks and if ecological tipping points are breached, either globally or locally, the implications could be severe and irreversible,” the researchers said. “Acting early is vital.”

The team that compiled the study was led by GFI and included researchers from the University of Oxford, the University of Reading, UNEP and the National Institute of Economic and Social Research. HM Treasury, the UK environment ministry and the Financial Conduct Authority also contributed, as did a number of UK-based financial institutions.

(Adds Aviva comment in eighth paragraph.)

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