Mar 24, 2022
Central banks and policymakers should address the significant global threats the biodiversity crisis poses to financial stability, according to a report released Thursday that asserts "healthy ecosystems provide resilience to growing climate shocks."
The financial sector "should align itself with the transformations that are necessary to deliver a global economy that is positive for nature."
The new paper is the product of researchers with the Network for Greening the Financial System (NGFS) and International Network for Sustainable Financial Policy Insights, Research, and Exchange.
The publication comes amid accusations that major central banks have been dragging their feet in addressing the climate crisis and after fossil fuel interests effectively tanked President Joe Biden's nominee for a key role at the Federal Reserve over her views on the fiscal risks associated with a rapidly warming planet.
In a foreword to the report, Ravi Menon--NGFS chair and managing director of the monetary authority of Singapore--says that while "biodiversity supports all life on our planet," humanity is "eroding this biodiversity at a pace that is severely damaging the natural ecosystems that provide us with food, water, and clean air. This in turn could pose significant risks to economic, financial, and social stability."
Although governments are the entities most responsible for addressing biodiversity loss, Menon says that the financial sector has a key role as well and "should align itself with the transformations that are necessary to deliver a global economy that is positive for nature."
"Financial regulators and central banks can and must enable the greening of the financial system; this role is not inconsistent with their mandates for price and financial stability," he adds.
The report authors describe the scale of the biodiversity crisis as such that "mitigation requires urgent 'transformative changes' in our socioeconomic and financial systems."
As such, the report says central banks and financial advisers should "develop comprehensive strategies to manage nature-related financial risks," including ones "related to the interactions between climate change and biodiversity loss, and to biodiversity loss resulting from other human pressures such as habitat degradation and over-exploitation."
The publication additionally outlines five action steps for central banks and supervisors to take:
- Recognize biodiversity loss as a potential source of economic and financial risk and commit to developing a response strategy.
- Upon identifying biodiversity-related financial risks, build the skills and the capacity to analyze and address those risks among central bank and supervisory staff, market participants and other stakeholders, and participate in related research.
- Assess the degree to which financial systems are exposed to biodiversity loss by, for example, conducting assessments of impact and dependency, developing biodiversity-related scenario analysis and stress-tests, and helping to create a dashboard of biodiversity metrics as part of an integrated approach.
- Explore options for supervisory actions on managing biodiversity-related risks and minimizing negative impacts on ecosystems.
- Help build the necessary financial architecture for mobilizing investment for a biodiversity-positive economy, including by considering how central banks' own operations should be conducted in the context of biodiversity loss.
Informed by the new paper, the NGFS on Thursday also published a separate statement that welcomes the five policy recommendations while calling for consideration of "nature-related financial risks" to be added as a mandate of the world's central banks.
According to Prof. Nick Robins of the Grantham Research Institute on Climate Change and the Environment and co-chair of the study group behind the new paper, the research rightly focuses on an area the financial sector must urgently address.
"Biodiversity loss is potentially as economically and financially impactful as climate change, but has so far received much less attention," Robins said in a statement.
"This report," he continued, "shows that these twin threats now need to be tackled in a joined-up way by central banks and supervisors to build a nature-positive financial system."
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