Study: Financial institutions should respond to increasing threat from biodiversity loss
New report warns biodiversity degradation is set to have significant economic and financial implications
Biodiversity degradation could pose a serious threat to financial stability, as businesses and their supply chains become ever more exposed to the fluctuating raw material costs and escalating operational and credit risks that can result from the loss of natural habitats.
Published today, Biodiversity and Financial Stability: building the case for action has been co-authored by a study group from the Network for Greening the Financial System (NGFS), a group of 95 banks and supervisors developing environmental risk management in the sector, and INSPIRE, an independent research network supporting the NGFS.
The authors found that biodiversity loss increasingly threatens economic and financial stability, and proposes a number of steps central banks and financial institutions should be taking to better understand and mitigate biodiversity-related risks.
“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,” said Nick Robins, co-lead of the study group and professor of practice at the Grantham Research Institute on Climate Change and the Environment at LSE, which acts as co-host to INSPIRE alongside the ClimateWorks Foundation.
“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,” he added.
The authors suggest that businesses, financial firms, and regulators should build tools to better address and assess biodiversity-related risks, work with other financial institutions to understand the risks arising from biodiversity, and support governments’ efforts to reverse biodiversity loss. Regarding the last point, the report suggests that economic actors prepare financial infrastructure to address the risks of biodiversity loss and transition to nature-positive financing through implementing the UN’s post-2020 Global Biodiversity Framework, a pathway that aims to end biodiversity loss by 2030.
Co-lead of the study group and chair of NGFS Workstream on Research, Dr Ma Jun, said: “A growing number of central banks and financial supervisors recognize 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.”
The study group will publish a final report in early 2022 that builds on their initial findings, and offers more recommendations for central banks and financial supervisors to address the micro and macroprudential risks that biodiversity loss poses.
The report comes at a time of increasing awareness of the effects of biodiversity loss ahead of COP26, at which environmental actors hope to see a renewed pledge to incorporate biodiversity measures in climate action.
The study is also published in the same week as the Taskforce on Nature-related Financial Disclosures (TNFD) announced that it has selected senior executives from across 30 financial institutions to serve as members of the group, which is seeking to establish a new nature-related risks reporting framework for businesses and financial firms. The UN-backed group – which aims to emulate the work of the Taskforce for Climate-related Financial Disclosures (TCFD) – aims to establish guidlines for investors and businesses to follow by 2023.
