Thematic Tags: Biodiversity

“Nature, Finance and the Macroeconomy: Risks, Impacts and Feedback effects”

The Asia School of Business, Bank Negara Malaysia, CEP, sustainable macro and INSPIRE invite you to this conference, taking place in person in Kuala Lumpur, Malaysia, on 19-20 October 2023. The conference addresses challenges posed by nature loss, including deforestation and land-use change, and the related environmental risks and impacts for the macroeconomy and finance. It aims to also discuss implications for monetary policy, financial supervision and climate policy.

Registration:

Please click on this link to register for the conference as an on-site or online attendee.

A full agenda will be made available below in early September, when the final list of presenters will be published. A PDF version of the invitation is available for download here. Please share it with your networks!

Building blocks for central banks to develop nature scenarios

Models and scenarios are increasingly being adopted by central banks and financial supervisors as a tool to support the assessment of climate risks, but existing scenarios currently do not sufficiently incorporate broader environmental risks, such as nature-related risks, into such assessments.

Nature scenarios are used in models to describe plausible future developments of all elements of nature, the development of socioeconomic variables and policies, and the interactions between them. A significant drawback is that outputs from nature–economy models and scenarios cannot readily be used by the financial sector.

In reviewing a selection of models currently used in economic and nature loss assessments, this briefing identifies five key issues for model and scenario development: input data needs; model assumptions; uncertainty around nature–economy interactions; the choice of global or local scenarios; and usability for financial institutions. While there are ways to address some of these challenges, more research is required to operationalise the solutions.

Overcoming these challenges could enable the introduction of more targeted monetary policies and prudential policies, and more effective financial sector risk management. It could also contribute towards shifting financing away from nature-harming investments.

Beyond climate: addressing financial risks from nature and biodiversity loss

There is increasing evidence that central banks and supervisors need to expand their environmental agendas beyond climate change. Globally, the richness and diversity of nature has declined at unprecedented rates over recent decades, posing far-reaching systemic risks for the financial sector.

The impacts of biodiversity loss call for urgent and transformative changes to economic and financial systems. This requires central banks and supervisors to collaborate with other policymakers to determine how the financial sector can manage nature-related financial risks, including how climate change and biodiversity loss interact. While only a limited number of policy tools have been developed to date, there are a range of options for integrating nature and biodiversity loss considerations into existing policy frameworks. These include updates to microprudential policies and disclosure requirements, and the use of macroprudential assessments and scenario analysis.

Building on the work of the NGFS-INSPIRE study group on Biodiversity and Financial Stability, this paper discusses the theoretical and practical need to extend the scope of central banks’ approach to the environmental crisis beyond the current focus on climate change implications to also include the drivers of biodiversity loss, the climate–biodiversity nexus, and the transmission channels of nature-related risk.

NGFS-GRASFI-INSPIRE Exchange – The scientific dimensions of biodiversity and its loss

Pablo Pacheco (WWF) will provide a scientific presentation on biodiversity, biodiversity loss and planetary boundaries, among others topics that will provide the necessary background for central bankers and supervisors willing to engage on environmental risks. This will be the second webinar of the current series on “environmental risks beyond climate change”.

Developing a precautionary approach to financial policy – from climate to biodiversity

Climate change and biodiversity loss have primarily been approached by financial authorities (central banks and supervisors) from the perspective of financial risk. The prevailing view is that there is insufficient information and understanding of environment-related financial risks within financial institutions. If such financial risks can be discovered, measured and disclosed, they can be priced into financial markets to support a smooth environmental transition and this market failure can be addressed.

However, environment-related financial risks have particular features that make them less amenable than other types of risk to standard financial risk management approaches. In particular, the ‘radical uncertainty’ characterising the long time horizons and the endogenous and non-linear dynamics involved with environmental change make quantitative calculations of financial risk challenging, if not impossible.

The authors propose in this paper an alternative, precautionary approach to financial policy, incorporating both prudential and monetary policies. As a framework it draws on the ‘precautionary principle’ and modern macroprudential policy traditions. A precautionary financial policy mindset acknowledges the importance of measurement practices and price discovery but justifies bolder policy action to shift the allocation of capital to shorter time frames better aligned with the uncertain and potentially catastrophic nature of environment-related threats, including the risks to, and posed by, financial institutions. The paper considers financial authorities’ tentative steps and possible tools in such a precautionary policy direction – and how these could be scaled up and mainstreamed.

This paper is part of a toolbox designed to support central bankers and financial supervisors in calibrating monetary, prudential and other instruments in accordance with sustainability goals, as they address the ramifications of climate change and other environmental challenges. The papers have been written and peer-reviewed by leading experts from academia, think tanks and central banks and are based on cutting-edge research, drawing from best practice in central banking and supervision.