A new report highlights the urgency for central banks and financial supervisors to act on the risk of unprecedented nature loss.
With biodiversity loss not only compounding climate-related risks but a global crisis in its own right, the report warns that current practices of only integrating climate-related risks and impacts in existing mandates of central banks and financial supervisors, and not including risks from nature loss, fall short in ensuring a sustainable financial system.
The WWF report Nature’s next stewards: Why central bankers need to take action on biodiversity risk – with contributions from I4CE, NatureFinance (formerly known as Finance for Biodiversity (F4B)), ECOFACT, CEP and IUCN – is published today within the scope of WWF’s Greening Financial Regulation Initiative which supports central banks, financial regulators and supervisors in enhancing the financial sector’s stability and resilience to climate-related and broader environmental and social risks, while enabling the mobilisation of capital for the transition to a low-carbon, resilient and sustainable economy.
“Central banks and financial supervisors have a critical role to play in the transition to a more sustainable and resilient financial system that benefits people, climate and nature” – Olivier Vardakoulias & Ivo Mugglin, WWF.
“Central banks and financial supervisors have built up significant expertise to start addressing climate-related risks. They must now leverage this capacity to scale up their engagement and include further interrelated environmental dimensions into their decision-making” – Chiara Colesanti, Fellow at the Council of Economic Policies.
“As climate change, the loss of biodiversity results in material financial risks for financial actors. In addition, it may create systemic risk stemming from a major economic and social disruption linked to the emergence of zoonoses” – Michel Cardona and Romain Hubert, I4CE.
Today the world faces a global nature crisis, threatening our climate, food, livelihoods and health. The ongoing COVID-19 pandemic, with its roots in rampant land-use change, deforestation and the wildlife trade, is the latest evidence that unsustainable human activity is pushing the planet’s natural systems that support life on Earth to the brink.
Driven by agriculture, deforestation is a major cause of climate change and biodiversity loss, undermining producing countries’ natural capital and impacting economies and financial stability. More than half of total forest loss between 2001 and 2015 was driven by commercial agriculture, translating into financial risks for financial institutions that are directly or indirectly exposed to it by financing of forest risk commodities.
Similarly, pressure on water resources can lead to severe consequences for economies and businesses dependent on water. In India for example, close to 40% of the gross credit exposure of Indian banks is in sectors where water risks are significant.
The new report also highlights how environmental degradation and biodiversity loss is not just material to finance, but finance is also material to the ability of the environment to sustainably regenerate itself. This means central banks and financial supervisors need to look beyond adequality managing the financial risks stemming from biodiversity loss. They also need to assess and measure the impacts of their own balance sheet as well as push for financial institutions to follow suit to ensure an orderly and safe transition to a more sustainable economy.
In addition to the financial case to act, the report highlights the legal grounds for central banks and financial supervisors to assume the responsibility bestowed upon them by international treaties and standards as well as national regulatory frameworks. These include the international standards for banking supervision or insurance supervision in which preventive measures and early intervention are required prior to the emergence of new risks. The report also highlights the duty of central banks and financial supervisors to align with broader governmental environmental objectives.
“Just as biodiversity is crucial to the stability of the global economy, it is crucial to the stability of the global financial system. The evidence is mounting on risks to individual businesses, but these risks also interact in a way that is systemic and explosive. Both policy and the market are moving towards disclosure of impacts through initiatives such as the EU’s proposed due diligence obligations and the Taskforce for Nature-related Financial Disclosures (TNFD). Financial regulators have a duty on behalf of the private sector to examine the long tail risks and ensure they are prepared to respond” – Charlie Dixon, Portfolio Manager, Finance for Biodiversity.
“Despite the lack of explicit references to biodiversity within financial regulations, the existing regulatory toolbox already enables financial regulators to address actual and potential biodiversity-related financial risks. In addition, there is a growing regulatory momentum seeking to place biodiversity-related considerations at the heart of key processes that are subject to regulatory expectations, such as governance and risk management frameworks” – Gabriel Ziero and Dilan Eberle, Ecofact.
Based on the findings of the report, WWF recommends to central banks and financial supervisors:
- The burden of proof should be reversed. Central bankers must assume that environmental degradation, including biodiversity loss, poses macroeconomic and financial risks in their jurisdictions unless it can be shown otherwise.
- Preventive measures should be taken to mitigate forecasted risks from biodiversity loss alongside climate change-related risks. The current regulatory framework provides the tools to do so, across microprudential supervision, macroprudential supervision and monetary policy. Central bankers should also address environmental risks in their own portfolios and should promote the necessary research.
- Central banks and financial supervisors should act consistently with internationally and nationally stated environmental objectives. They should advocate for common international financial regulation that includes environmental dimensions.
“Climate and nature are two sides of the same coin. Central banks and financial supervisors today have a unique opportunity to utilize mechanisms designed to address climate change-related risks and impacts to also tackle biodiversity loss. Only by addressing them together can they ensure a sustainable financial system. One that is resilient to the planetary and socio-economic shifts headed our way” – Maud Abdelli, Initiative Lead of WWF’s Greening Financial Regulation.