Biodiversity and financial stability: building the case for action

NGFS-INSPIRE Study Group interim report

This report is the second output of the joint NGFS-INSPIRE Study Group on Biodiversity and Financial Stability. The group was established to help central banks and financial supervisors fulfil their mandates in the face of financial risks stemming from biodiversity loss.

The report is intended as a stocktake of the current context for central bank and financial supervisory action on biodiversity loss. It sets out the state of understanding on the linkages between biodiversity-related risks and financial stability, provides examples of emerging central bank and private finance activity, and identifies key themes, challenges and open questions. It will consider emerging options for action and research and set the stage for the Study Group’s more elaborated Final Report in early 2022.

The report takes forward the ideas set out in a June 2021 Vision Paper, to provide:

• A clearer picture of the potential economic and financial impacts of biodiversity loss, grounded in the latest scientific evidence on this issue.
• A discussion of the challenges associated with assessing biodiversity-related financial risks, and potential ways forward for central banks and financial supervision authorities, with a focus on the assessment of economic and financial sector dependencies and impacts on biodiversity as a first step, and the development of climate-related scenarios as a future step.
• The first overview of emerging central bank and private financial actors’ activity relating to biodiversity issues.
• Consideration of the role the financial system might play in the proposed post-2020 Global Biodiversity Framework.
• Suggested options that central banks and financial supervisors might wish to consider regarding biodiversity loss.

Proposed next steps for central banks and financial supervisors

To assess biodiversity-related financial risks while accounting for outstanding methodological challenges, the authors suggest that central banks and financial supervisors can:

• Begin building the skills, capacities, tools and cooperation to address biodiversity-related economic and financial risks.
• Assess the dependencies and impacts of their financial institutions – through the economic activities they support – on ecosystem services and biodiversity.
• Become more familiar with existing biodiversity–economy models and develop ad hoc methodological approaches that better capture the risk of impacts cascading through economic and financial actors.
• Signal to the financial institutions that they supervise, other economic actors and policymakers the importance of understanding the risks arising from their dependencies and impacts on biodiversity. In addition, and within the remit of their mandates, they should support governments’ efforts to reverse biodiversity loss.

“Following the publication of a Vision Paper in June, which set out the links between biodiversity loss and the macroeconomic and financial systems, this Interim Report delves deeper into the challenges related to the assessment of such links and provides potential ways forward for central banks and financial supervisors to incorporate these insights in the exercise of their tasks. Its publication ahead of the first part of the 15th meeting of the Conference of the Parties to the Convention on Biological Diversity in October is very timely.” From the foreword by Frank Elderson, Chair of the Network for Greening the Financial System

Preparation of the report

This report was prepared by the Study Group and primarily authored by Elena Almeida (LSE consultant), Simon Dikau (LSE), Natasha Kunesch (LSE consultant), MA Jun (People’s Bank of China and NGFS), Mark Nicholls (LSE consultant), Nick Robins (LSE), Mathilde Salin (Banque de France), Tianyin SUN (Tsinghua PBCSF and NGFS) and Romain Svartzman (Banque de France and NGFS). The report received direct written contributions and comprehensive comments from Katie Kedward (UCL), Sabrina Muller (LSE), Giovanni Ruta (World Bank), Josh Ryan-Collins (UCL), Matthias Täger (LSE) and Thomas Viegas (Bank of England).

About the Joint NGFS-INSPIRE Study Group on Biodiversity and Financial Stability

The Study Group was established in April 2021 to establish a research-based approach to how central banks and supervisory authorities can fulfil their mandates in the context of biodiversity loss. It is co-chaired by Dr MA Jun (Chairman of the Green Finance Committee of the China Society for Finance and Banking and chair of the NGFS Workstream on Research) and Professor in Practice Nick Robins (LSE and INSPIRE).