National security and environmental risks: dual threat to portfolios

The war in the Middle East has forced investors to reflect on national security, energy price volatility and disruptions to trade. These are pressing matters without question. But beyond the immediate market fallout lie long-term risks linked to the conflict – risks that investors ignore at their peril.

Conflicts weaken ecosystems and accelerate environmental degradation, which can destabilise economies and financial markets long after the fighting subsides. Two months into the conflict, environmental damage is already evident. Damage to desalination plants in an arid region is accelerating the depletion of scarce groundwater. Strikes on refineries and industrial sites risk contaminating irrigation systems and agricultural supply chains, aggravating food insecurity.

These pressures can cascade into systemic risk. According to a report by the Institute and Faculty of Actuaries and Anglia Ruskin University, biodiversity loss, climate shocks and geopolitical conflict are converging to create potentially catastrophic shocks for the financial system and the wider society.¹

“Ecological risks and national security risks are deeply connected. As we go through some of the crises, investment portfolios are getting hit by risks that converge and amplify together,” Yi Shi, client portfolio manager and impact specialist at Pictet Asset Management, told clients in a recent conference.

This is where the concept of Planetary Boundaries becomes
particularly relevant in putting environmental risks into perspective. The framework identifies nine critical environmental dimensions – including climate, fresh water, land use and biodiversity. It then defines the safe operating space within which our economy should operate.²

Speaking at the event, Professor Beatrice Crona of the Stockholm Resilience Centre highlighted that seven of the nine boundaries have now been breached due to accelerating environmental degradation, moving the planet further away from the stable conditions of the past 10,000 years.

The latest update in September 2025 shows that ocean acidification has now crossed its threshold, undermining marine ecosystems and weakening the oceans’ role as a key planetary stabiliser.³

Crucially, these boundary transgressions do not occur in isolation. Overshooting one boundary could trigger a breach in another, Prof Crona added. For example, as temperatures rise, droughts intensify and forests become more vulnerable to wildfires, undermining their ability to store carbon. In some parts of the world, forest ecosystems are releasing more planet-warming gas than they capture. This represents a feedback loop that is shrinking the safe operating space further.⁴

Scientists studying all the possible interactions within planetary boundaries have found evidence that more than half of these have meaningful relationship — and the vast majority of these, or 81%, are mutually reinforcing.

Prof Crona noted that intensifying extreme weather events – such as floods in Valencia or wildfires in Sweden – are already causing real-life economic pain, from damage to vital rail infrastructure to falling property values in submerged areas.

These shifts are rarely linear: pressures can build gradually and remain difficult to detect until critical tipping points are reached, beyond which systems may experience abrupt and irreversible changes.⁵

Nature plays a dual role in this context: healthy ecosystems can buffer shocks, while degraded ones amplify risk. The loss of ecosystem integrity reduces the resilience of the biosphere, weakening the very foundations upon which economies depend. Increasingly, this is being recognised as a national security issue, with governments such as the UK explicitly identifying ecosystem collapse as a systemic risk.⁶

“Ecosystem collapse is a matter of national security. This is getting real, unfortunately.” Prof Crona said.

Scientists characterise the convergence of pressures as a polycrisis – multiple global crises that are linked in ways that are significant in scope, devastating in effect, but poorly understood.⁷

“We’re in a polycrisis. This is not about bouncing back to business as usual; it’s about changing how we do business to survive and thrive,” Prof Crona told the attendees.

Building portfolio resilience and solutions

For investors, this shifts the focus to building a resilient portfolio that withstands disruption and adapts to shifting conditions. Pictet Asset Management uses the planetary boundaries framework to identify where environmental pressures are most likely to materialise as financial risks, and where solutions may emerge.

Shi explained that companies, particularly those with fixed assets and complex global supply chains, are beginning to integrate nature-related risks into resilience planning and stress testing. For example, businesses are investing in solutions such as efficient cooling technologies and smart water management systems that help them adapt to extreme climate risks.⁸

But businesses aren’t simply treating biodiversity loss as a risk to be contained; many also see it as a commercial opportunity. Shi added that Pictet Asset Management has identified a group of specialised companies developing innovative solutions to address the key drivers of biodiversity loss such as climate change, water stress, pollution, and unsustainable land use. And, importantly for investors, these solution providers often benefit from stronger long-term revenue visibility and growth, which is reflected in margins, earnings and equity performance. Building stakes in such firms is one way environmental investors can achieve a clear alignment between environmental impact and financial returns.

The opportunities are particularly attractive within the electricity supply chain. Electricity demand is expected to increase by 60% between 2023 and 2030 in Europe alone, fuelled by the expansion of AI data centres, EVs and reindustrialisation. This places pressure on ageing grid infrastructure. Around 40% of Europe’s network is over 40 years old, approaching the end of the typical lifespan of power lines.⁹

An ageing grid and interconnectors mean higher power losses and more constraints on connecting new renewables, increasing the risk of outages – a typical bottleneck for decarbonisation. Increasing frequency and intensity of extreme weather events further raises the likelihood of grid-related outages. This presents a significant investment need in grid modernisation and resilience.

For long-term investors, the focus is on identifying solution providers whose business models are inherently aligned with environmental outcomes. In these cases, financial and environmental performance go hand in hand. “Every unit of revenue from environmental solution sold and used corresponds to a measurable positive impact,” Shi said.

There is another dimension to environmental investing. Corporate engagement, or harnessing shareholder power to bring about an improvement in a company’s environmental credentials, can help investors mitigate risks and create long-term value. Specifically, having dialogues with portfolio companies on specific, realistic, and time-bound targets can raise awareness, encourage better management of nature-related dependencies and impacts and support the development of forward-looking solutions.

Measuring impact remains complex when it comes to supply chains. While upstream sectors such as mining and forestry are relatively well mapped amongst large players, data gaps persist – especially in midstream manufacturing and processing segments that are dominated by micro, small and medium enterprises.

However, thanks to sustained engagement by institutional investors, some of the leading, downstream or consumer facing companies have improved their supply chain traceability and disclosure, enabling investors to identify companies with relatively lower adverse impacts and dependencies on nature across the value chain compared to their peers.

By backing solutions and engaging for change, investors can align measurable environmental impact with durable financial returns.