Biodiversity loss is happening: here’s how central banks and financial supervisors need to respond - new report
Biodiversity is declining at unprecedented rates – and the economic and financial risks associated with this loss are growing. But there are steps that central banks and financial supervisors could take, finds a new report published today by a group of sustainable finance experts.
The report is co-authored by a study group from the Network for Greening the Financial System (NGFS) and INSPIRE, which is a research network cohosted between the ClimateWorks Foundation and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science (LSE).
The Biodiversity and Financial Stability: building the case for action report found that there is growing evidence that biodiversity loss could have significant economic and financial implications, because the decline of ecosystem services poses physical risks for the economic actors that depend upon them.
This potential financial instability means that it falls within the mandates of central banks and financial supervisors to better assess the risks of biodiversity loss. The authors recommend four steps that central banks and financial supervisors could take to tackle the problem:
First, they could begin building the skills, capacities, tools and cooperation to address biodiversity-related economic and financial risks.
Second, they could assess the dependencies and impacts of their financial institutions – through the economic activities they support – on ecosystem services and biodiversity. They could 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 systems.
Third, they could 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.
Last, the authors say central banks and financial supervisors could – within the remit of their mandates – support governments’ efforts to reverse biodiversity loss. They could do this particularly regarding the implementation of the post-2020 Global Biodiversity Framework by addressing financial risks and preparing the financial infrastructure required for nature-positive financing.
Nick Robins co-led the study group. He is professor of practice at the Grantham Research Institute on Climate Change and the Environment at LSE, and said:
“This report shows the severity of the macroeconomic consequences of biodiversity loss and profiles the increasing efforts by central banks and supervisors to understand the implications for both financial institutions and for the system as a whole.
“As we head towards the COP15 on biodiversity and COP26 on climate, it’s clearer than ever that these two imperatives need to be addressed in an integrated way, thereby helping to reduce the rising physical and transition risks from environmental depletion that are now facing the financial system.”
Dr Ma Jun, Chair of NGFS Workstream on Research and Special Advisor to the Governor of the People’s Bank of China co-led the study group. He said:
“A growing number of central banks and financial supervisors recognise the risks that climate change poses to financial stability. Biodiversity loss poses risks of similar, and perhaps greater magnitude to many countries, while it is also clear that climate and biodiversity are interlinked and often self-reinforcing issues.
“Central banks and supervisors need to work on actions to guide financial institutions to protect biodiversity, including via requirements for them to assess the impact of investment activities on biodiversity and to disclose impact information. However, central banks and regulators face considerable challenges – in terms of data, methodologies, tools and capacity – in understanding and responding to the risks posed by biodiversity. There is significant potential for bodies such as the NGFS to help central banks and financial supervisors cooperate in addressing these challenges.”
This Interim Report sets the stage for a final report from the study group, due to be published in early 2022. That report will explore in further detail linkages between biodiversity loss, the macroeconomy and the financial system, drawing on existing research and leading practice. The report will more comprehensively consider options for central banks and financial supervisors to address the micro and macroprudential risks that biodiversity loss poses as well as set out a research agenda.
The study group is co-led by Dr Ma Jun (Chair of NGFS Workstream on Research and Special Advisor to the Governor of the People’s Bank of China) and Professor Nick Robins (Grantham Research Institute on Climate Change and the Environments).
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Notes to editors:
The document is published as part of the “NGFS Occasional Papers” series and, therefore, the views and opinions expressed do not necessarily represent those of the NGFS.
About the NGFS
The NGFS, launched at the Paris One Planet Summit on 12 December 2017, is a group of central banks and supervisors, which on a voluntary basis are willing to share best practices and contribute to the development of environment and climate risk management in the financial sector, and to mobilize mainstream finance to support the transition toward a sustainable economy. The NGFS brings together 95 central banks and supervisors and 15 observers. Together, they represent five continents and around 85% of global greenhouse gas emissions, and are responsible for the supervision of all of the global systemically important banks and two thirds of global systemically important insurers. The NGFS is chaired by Frank Elderson, member of the ECB’s Executive Board. The Secretariat, headed by Jean Boissinot, is provided by Banque de France.
The International Network for Sustainable Financial Policy Insights, Research, and Exchange (INSPIRE) is an independent research network built to support the central banks and supervisors of the Network for Greening the Financial System (NGFS) in its work to manage climate and environmental risks and mobilise finance to support the transition to a sustainable economy. The INSPIRE secretariat is co- hosted by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and the ClimateWorks Foundation. It is guided by an Advisory Committee and has commissioned over 30 research projects across a range of critical themes.