Nature and biodiversity risks have the potential to threaten financial stability and should be seen as part of central banks and banking supervisors’ mandate.

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On March 26, commercial banks around the world – including E.SUN Financial Holdings, Garanti BBVA, Santander and UniCredit – turned off their lights in support of the World Wide Fund for Nature’s (WWF) “Earth Hour”. According to WWF: “Our leaders have promised to put nature at the heart of climate action, to secure a safer future for all of us. Now we must make sure they deliver on their promise.”

This highlights the growing recognition that it is not possible to address climate without including nature and biodiversity, as managing nature-related risks will play a critical role in solving the climate crisis.

Important work has already begun, with the Taskforce on Nature-related Financial Disclosures (TNFD) recently launching a beta version of its nature risk-management and disclosure framework for nature, with plans to release the final version in 2023. In her Better Banking column for the April issue, Silvia Pavoni spoke to TNFD co-chair David Craig about why a nature-related financial disclosures framework is needed.

Of growing importance to central banks and banking supervisors is how biodiversity loss could threaten financial stability. They are now considering their role in addressing nature-related risks.

On March 24, a special study group set up by the Central Banks and Supervisors’ Network for Greening the Financial System (NGFS) and International Network for Sustainable Financial Policy Insights, Research, and Exchange, an independent research network, released a report, ‘Central banking and supervision in the biosphere: An agenda for action on biodiversity loss, financial risk and system stability’, which provides the first global assessment of why and how central banks and supervisors can respond to rising risks from biodiversity loss.

During a webinar hosted by the London School of Economics, Ma Jun, chair of the NGFS workstream on research and special advisor to the governor of the People’s Bank of China, said that one of the report’s key messages was that addressing biodiversity, in relation to financial risks, falls within central banks and financial supervisors’ mandate of maintaining financial stability.

“While the primary responsibility for confronting the biodiversity crisis rests with governments and environmental ministries, actions by central banks and supervisors can play a complementary role in protecting nature and biodiversity by reducing biodiversity-related financial risks and help guide financial resources to support nature positive activities,” he said. “Addressing financial risks falls within our mandate; biodiversity loss can lead to financial risks, including physical and transition risks.” The latter risk results from the misalignment between a firm’s impacts on biodiversity and developments aimed towards achieving a nature-positive economy.

Frank Elderson, a member of the European Central Bank’s executive board and co-chair of the Task Force on Climate-related Financial Risks of the Basel Committee on Banking Supervision, added: “We need to bring this work up to speed in line with our climate-related work. It is clear that we can no longer drag our feet – it is vitally important that we [address nature-related risks] with great urgency.”

“As we have a growing body of empirical evidence, this should be a call to action. [Nature] is not less important nor less urgent than climate. And nature is interconnected with climate,” said Sylvie Goulard, second deputy governor of the Banque de France. “The report mentions the risks of negative trade-offs if we deny this [interconnectedness], but there is also a positive side. When you fight against deforestation, you also promote the means to capture carbon dioxide.”

The report makes five recommendations for central banks and supervisors:

  • Recognise biodiversity loss as a potential source of economic and financial risk and commit to developing a response strategy.
  • Build the skills and the capacity to analyse and address biodiversity-related financial risks.
  • Assess the degree to which financial systems are exposed to biodiversity loss.
  • Explore options for supervisory actions on managing biodiversity-related risks and minimising negative impacts on ecosystems.
  • Devote efforts to building the necessary financial architecture for mobilising investment for a biodiversity-positive economy, including by considering how central banks’ own operations should be conducted in the context of biodiversity loss.

Brazil’s central bank has already taken steps in this direction, enacting regulation in September 2021 that includes social, environment and climate risk within its financial institution review framework. “Within the prudential framework, biodiversity degradation is explicitly mentioned as an environment risk, side by side with air and water pollution, illegal exploration of natural resource, etc,” said Otávio Damaso, deputy governor for regulation at Banco Central do Brasil. “Nevertheless, we are already considering revising this framework to improve our approach to the risk of biodiversity loss.”

NGFS, which has 108 members and 17 observers, welcomed the report and plans to create a taskforce to mainstream the consideration of nature-related financial risks across its activities, especially its workstreams.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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