Projects: BIODIVERSITY

28 March: The level of world economic activity driven by explosive growth in population and living standards since the late 18th century has reached utterly unprecedented levels under a longer-term view. Equally astonishing has been the pace of environmental degradation because of this expansion. According to recent NGFS scenarios, successful mitigation of climate change–the most salient dimension of such degradation– need not materially affect world GDP in the long run, and thus chiefly constitutes a problem of risks, whose successful management would allow to achieve similar growth outcomes.

This paper reviews the recent evidence on biodiversity loss and ecosystem degradation, an equally important but much less salient dimension of the environmental crisis. Simple calculations suggest halting its alarming recent trends will involve problems of both first as well as second moments: the transition will have to deal with risks, but even a successful management of these will probably require adjusting expectations about the possibilities of future economic and population growth. We believe this contrast should receive special attention as the focus of environmental-economic modelling in general, and the seminal work by the NGFS in particular, expanding its focus to include biodiversity in macro-financial analysis. We also present new evidence consistent with the intuition that population growth dominates the negative impact of growth on biodiversity, especially since the second half of the 20th century. This supports the notion that territories rich in biodiversity, but poor and in the early stages of the demographic transition will be critical for the preservation of natural capital.

24 March: In order to contribute to the multiple efforts for the transformation of our economy into a system that effectively maintains and restores biodiversity, we introduce a proposal aimed at going further in the integration of ecosystem-interdependencies
information at the heart of organizational processes and decision-making procedures at different levels. These methods also aim to take into consideration the great variety of decision-making and action contexts that characterize the realm of biodiversity conservation. We argue that such an endeavor requires to turn to the field of “ecological accounting”, both on a conceptual level and on a practical level, to put forward concrete methods and tools for collective decision and action.

The
paper hence addresses the following question: what kind of ecological accounting concepts and methods can be sense-making and scientifically sound, to support the management of biodiversity-related risks and reorganize our economic system towards the achievement of biodiversity conservation/restoration goals ?

24th March: NGFS-INSPIRE Study Group on Biodiversity and Financial Stability have published their final report ‘Central Banking and Supervision in the Biosphere: An agenda for action on biodiversity loss, financial risk and system stability’.

It finds 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. 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 its 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. Financial authorities could include biodiversity loss within their green finance and environmental strategies, taking an integrated approach which highlights the links with climate change as well as the specific threats that it might pose to financial and price stability.
• Central banks and financial supervisors should build the skills and the capacity to analyse and address these risks. This should cover central bank and supervisory staff as well as market participants and other stakeholders. Emerging and developing economies have particular needs for capacity-building, and there is a rich agenda for further research to strengthen the evidence-base.
• Central banks and financial supervisors need to assess the degree to which financial systems are exposed to biodiversity loss. This could include conducting assessments of financial sector dependency and of impacts on biodiversity, as well as developing biodiversity-related scenario analysis and stress tests, and helping to create a dashboard of biodiversity metrics.
• Central banks and supervisors need to explore options for supervisory actions to manage biodiversity-related risks and minimise negative impacts on ecosystems. This could include the development of supervisory expectations of financial institutions such as banks, insurers and investors in relation to governance, risk management and strategy, disclosure and financial conduct.
• Central banks and financial supervisors can help to build the necessary financial architecture for mobilising investment that helps to conserve biodiversity. This could include contributing to the development of biodiversity taxonomies, exploring options for integrating biodiversity-related considerations into monetary policy, and incorporating biodiversity protection within central bank investment portfolios.

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.

In response to the work of this Study Group the NGFS has issued a statement announcing it will establish a task force to mainstream the consideration of nature-related financial risks across its activities.

Read the NGFS statement here.

Read the NGFS’s press release here.

Read INSPIRE’s press release here.

24 March: There is growing awareness amongst both financial policy makers and financial institutions of the need to better understand the links between the financial system and biodiversity loss. Central banks and financial supervisors have so far focused more on the risks posed by biodiversity loss to the financial system (“financial materiality”) than the impacts of finance on biodiversity (“environmental materiality”).  In the wider biodiversity-finance sphere, the emphasis has been on the creation of new financial products or investment opportunities associated with the restoration of nature or offsetting damages – so called ‘nature-based solutions’. Less attention has been paid to the institutional relations that connect macro-financial and ecological systems and the growing importance of financial actors, incentives, and practices in shaping human demands upon the biosphere.

In this context, we study the agri-finance nexus and find that finance-oriented practices such as maximizing agricultural land productivity, realising capital gains, and achieving scale are systemically associated with land-use change and intensive agricultural practices that drive biodiversity loss and degradation. Importantly for policy makers, these findings indicate the financial sector to be indirectly contributing to the threat of breaching critical ecological tipping points, which would pose systemic macrofinancial risks. Central banks and supervisors should focus their attention on encouraging the avoidance of such practices by employing both monetary and (macro-)prudential policy toolkits. Given such activity falls outside the sphere of standard financial regulation, to do so will require greater coordination with other government departments, including environment agencies as well as international financial agencies.

24 March: This policy brief calls on central banks and financial supervisors to build and use a dashboard of biodiversity metrics to assess biodiversity risks in terms of both dependencies and impacts. In order for these metrics to become fully operational, they should cover risks for firms and households, account for the risks of tipping points, and address micro and macro dimensions of biodiversity risks – including systemic societal risks. They should furthermore include geographical information to cover the location of economic activities (including the supply chain) and the local state of biodiversity loss. Moreover, these metrics should be able to reflect the vulnerability and resilience of companies and households vis-à-vis biodiversity risks.

Given the rapid development of biodiversity risk metrics and the rise of sustainable finance, central banks and financial supervisors can and should take a leading role in establishing an appropriate institutional framework to further develop these metrics and ensure that they are trustworthy and can be used effectively. Collaboration with various actors in an inclusive and open way is crucial for the success of this endeavour. This process will also support the various institutions in providing the data for the dashboard, contributing to the development of metrics, and building up their own implementation capabilities.

22 March: The issue of biodiversity has entered the sphere of finance very recently, precipitating the confrontation of two divergent universes. Such a marriage of the living world and its natural complexity with the area of numbers, money and ‘rational’ economic agent decision is indeed not intuitive. This short paper reviews the different conceptual and theoretical frameworks called upon to apprehend, capture, and integrate biodiversity, and more broadly nature, into the financial system via its various components, with a focus on financial supervisors and monetary authorities. We analyse in particular the challenge of quantifying how biodiversity loss can affect a financial product, portfolio or institution through the use of traditional concepts such as prices and financial risk and examine the main limitations and implications of such approaches.

15 March: Bank Negara Malaysia and the World Bank published today a report entitled “An Exploration of Nature-related Financial Risks in Malaysia”.

This exploratory study, jointly undertaken by Bank Negara Malaysia and the World Bank, uses local and global data to examine the relationship between the Malaysian financial sector and nature. It also assesses potential exposures to nature-related risks through banks’ financing activities.

Bank Negara Malaysia Governor Tan Sri Nor Shamsiah said, “Ecosystem and planetary health matters to economic and financial stability. While the primary responsibility for addressing these priorities rests with the government, the financial industry and authorities have a critical interest in deepening our understanding and appreciation of the interactions between climate and nature-related risks – because how these risks evolve, both affect and are affected by, the actions of financial institutions.”

“By identifying and quantifying nature-related financial risks, authorities will be better positioned to prioritize initiatives within their scope of mandate in managing this concern,” said Ndiame Diop, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand. “We are happy to have partnered with Bank Negara Malaysia to support their leadership on this issue. This report is the first of its kind published by a central bank in Asia. We hope that it will provide an example for other countries facing similar challenges,” added Ndiame.

The report provides a launch pad for further study on nature-related risks and highlights the importance of tackling nature loss and climate change in a coherent manner. It also recognises the opportunity to leverage on the progress made on climate initiatives to address broader nature-related risks. Bank Negara Malaysia will continue to engage with the financial sector and other key stakeholders to build capacity in this area.

27 January: If nature is not protected, at least USD 10 trillion of GDP will be lost by 2050 due to the decline of ecosystem services.  By identifying and assessing nature-related financial risks, nature can be integrated into financial decision making, recognising nature as the heart of the economy and remaking the relationship between people and the planet.

CISL and financial institutions have been conducting assessments of nature-risks. Using the Handbook for Nature-related Financial Risks (CISL, 2021), members from the Banking Environment Initiative and Investment Leaders Group are assessing the risks posed to specific sectors and geographies by degraded land, water curtailment and the EU Farm to Fork Strategy. To complement this analysis, the institutions are also mapping nature-risks in different share indices.

In this use case, Robeco quantified the financial risk of land degradation to the agricultural value chain, quantifying valuation impact.

Following an extreme weather event those along the value chain connected to degrading land saw a materially negative impact on valuation:

• Farmers operating predominantly on degrading land saw their market value decline by 13 per cent
• Small packaged food companies that source from areas of degrading land saw a negative impact on valuation as high as 45 per cent.
• The smaller and less diversified a company, and the more connected to degrading land, the worse the valuation impact.

The analysis showcased the financial materiality of land degradation, underscoring the need for investors to incorporate factors like soil health into investment decisions. It also highlighted the need to actively engage with companies in the agribusiness sector to guide them to tackle nature-related risks in their business strategies.

Key points of upcoming use cases

With use cases ongoing and more due to be published, CISL published a preview of use cases in October 2021 containing the following key points:

1. data exists today to assess some nature-related financial risks
2. tools are available to map financial portfolio exposure to nature-related risks
3. some responses to nature loss (transition risks) can be modelled today with limited specialist guidance
4. first assessments of nature risk promote engagement within financial institutions and between financiers and companies
5. the current lack of supply chain transparency is a key barrier to assessing the scale of risks.