A new report by WWF 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 new report “Nature‘s next stewards: Why central bankers need to take action on biodiversity risk” 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 – with contributions from I4CE, F4B, ECOFACT, CEP and IUCN – highlights that “while the human-induced alteration of ecosystems and habitats is the major driver of biodiversity loss, the latter is in turn reducing the resilience of ecosystems to shocks in a self- reinforcing vicious loop. This is further accentuated by cli- mate change, as increases in temperatures and shifts in precipitation are fundamentally affecting both ecosystems and species. This creates another vicious circle, as it reduces the capacity of nature to sequester carbon, hence accelerating climate change 1. In short, biodiversity loss and cli- mate change are inextricably tied”.
“Meanwhile, biodiversity loss is increasingly fueling economic vulnerabilities and risks by undermining key ecosystem services and natural resources on which the economic system depends. Indicatively, a 2020 World Economic Forum report estimates that over 50% of the Gross Value Added of six key global industries depend on nature to varying degrees. Likewise, the Natural Capital Finance Alliance estimates that more than 60% of market capitalization in the FTSE 100 is highly de- pendent on nature. The economic cost of nature degradation is already significant and is expected to increase if no decisive action is taken to curb current trends. Indeed, recent research suggests that, under a business-as-usual scenario, biodiversity loss could cost up to $9.8 trillion of global GDP by 2020”, the report warns.
Olivier Vardakoulias and Ivo Mugglin, WWFCentral 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.
Chiara Colesanti, Fellow at the Council on Economic PoliciesCentral 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.
Michel Cardona and Romain Hubert, I4CEAs climate changes, 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.
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 adequately 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.
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.
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