Biodiversity loss poses ‘a significant and under-appreciated’ threat to financial stability, new report says

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Biodiversity loss poses a significant and under-appreciated threat to financial stability, and central banks and financial supervisors should act to confront nature-related risks, according to a new report by a group of central bankers, financial supervisors and academic researchers.

Titled ‘Central banking and supervision in the biosphere: An agenda for action on biodiversity loss, financial risk and system stability’, the report argues that biodiversity loss poses systemic risks in the same way as climate change.

The report was co-authored by a special study group set up by the Central Banks and Supervisors’ Network for Greening the Financial System (NGFS) and INSPIRE, an independent research network. The study group consisted of more than 100 central bankers, supervisors and researchers.

The study group was co-chaired by Nick Robins, who is professor in practice for sustainable finance at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science, and also co-chair of INSPIRE.

Professor Robins commented on the report: “Biodiversity loss is potentially as economically and financially impactful as climate change, but has so far received much less attention.

“This report shows that these twin threats now need to tackled in a joined-up way by central banks and supervisors to build a nature-positive financial system.”

The report argues that economic activity and financial assets depend upon the ecosystem services provided by biodiversity and the environment. This means that there are physical risks to finance if these services are undermined.

But the transition to a global economy that protects nature also creates potential risks related to policy, technology, market and reputation. In addition, the financial system has an impact on biodiversity through the economic activities that are enabled by it lending, investment and insurance.

The report provides the first global assessment of why and how central banks and supervisors can respond to rising risks from biodiversity loss.

It identifies 45 examples of authorities already taking action in countries such as Brazil, China, France, Malaysia, the Netherlands and the UK. It concludes that these initial first steps now need to be developed into a comprehensive response.

To achieve this, the report makes five recommendations:

  • Central banks and supervisors should recognise biodiversity loss as a potential source of economic and financial risk and commit to developing a response strategy.
  • Central banks and financial supervisors should build the skills and the capacity to analyse and address these risks.
  • Central banks and financial supervisors need to assess the degree to which financial systems are exposed to biodiversity loss.
  • Central banks and supervisors need to explore options for supervisory actions to manage biodiversity-related risks and minimise negative impacts on ecosystems.
  • Central banks and financial supervisors can help to build the necessary financial architecture for mobilising investment that helps to conserve biodiversity.

In addition, the report sets out a research agenda for central banks and academic researchers to continue to address some of the analytical and data gaps that the study group identified in the course of its work.

Developing scenarios that describe the possible impacts of biodiversity loss, analogous to those developed for climate, is likely to be an area of particular focus.

The full report is available on the London School of Economics and Political Science-website.