Thematic Tags: Biodiversity

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.

8 October: Today, the joint Study Group on ‘Biodiversity and Financial Stability’ – launched in April 2021 by the NGFS and INSPIRE – published an Interim Report entitled “Biodiversity and Financial Stability: building the case for action”.

The Study Group is co-led by Dr Ma Jun (Chair of NGFS Workstream on Research and Special Advisor to the Governor of the People’s Bank of China) and Professor Nick Robins (Grantham Research Institute on Climate Change and the Environments) and comprises around 30 NGFS members and observers, and around 30 INSPIRE researchers, from academia, civil society groups and think-tanks. The document is published as part of the “NGFS Occasional Papers” series and, therefore, the views and opinions expressed do not necessarily represent those of the NGFS.

The report finds that there is growing evidence that biodiversity loss could have significant economic and financial implications because the decline of ecosystem services poses physical risks for the economic actors that depend upon them. These actors also face transition risks from policies designed to halt biodiversity loss, such as the post-2020 Global Biodiversity Framework, expected to be agreed at COP 15 conference in Kunming, China, next spring.

Frank Elderson, Chair of the NGFS and member of the ECB’s Executive Board: “Global policymakers are now becoming increasingly aware of the consequences of biodiversity loss. It is highly encouraging that NGFS and INSPIRE deliver their interim report on the risks of

biodiversity loss for the economy and the financial system and the implications for central banks and supervisors ahead of Biodiversity COP-15”.

This potential financial instability means that central banks and financial supervisors could start to better assess the risks associated with the loss of biodiversity. The authors recommend four steps that central banks and financial supervisors can tackle the problem:

• First, they can begin building the skills, capacities, tools and cooperation to address biodiversity-related economic and financial risks;
• Second, they can assess the dependencies and impacts of their financial institutions – through the economic activities they support – on ecosystem services and biodiversity. They can become more familiar with existing biodiversity-economy models and develop ad hoc methodological approaches that better capture the risk of impacts cascading through economic and financial systems;
• Third, they could signal to the financial institutions that they supervise, other economic actors and policymakers the importance of understanding the risks arising from their dependencies and impacts on biodiversity;
• Last, the authors say central banks and financial supervisors could, within the remit of their mandates support governments’ efforts to reverse biodiversity loss, in particular regarding the implementation of the post-2020 Global Biodiversity Framework by addressing financial risks and preparing the financial infrastructure required for nature-positive financing.

“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”, says Professor Nick Robins. “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.”

“A growing number of central banks and financial supervisors recognise 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”, says Dr Ma Jun. “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.”

This Interim Report sets the stage for a final report from the Study Group, due to be published in early 2022. That report will explore in further detail linkages between biodiversity loss, the macroeconomy and the financial system, drawing on existing research and leading practice. The final report will more comprehensively consider options for central banks and financial supervisors to address the micro and macroprudential risks that biodiversity loss poses as well as set out a research agenda.

18 June: NGFS and INSPIRE have established a joint Study Group on Biodiversity and Financial Stability, with the aim to understand the potential implications of biodiversity loss for financial stability.

Biodiversity is declining faster than at any time in human history. Policy efforts have been unable to slow the global loss of biodiversity, while the pressures driving this decline continue to intensify. In addition to increasing awareness of the impacts of economic activities on biodiversity, some central banks and financial supervisors are starting to recognise the potential of biodiversity loss as a threat to their core mandates for financial and monetary stability. Biodiversity loss could pose risks to the financial system through complex feedback loops, externalities and tipping points, including transition risks (e.g. incompatibility between financial institutions’ exposures and government measures) and physical risks (e.g. declining performance of assets or economic activities that depend upon biodiversity).

The global economy and financial system are embedded in the biosphere. Companies both depend on ecosystem services such as clean air and freshwater, and impact on the natural systems that provide those services. A range of market and institutional drivers explains the continued failure to value biodiversity but efforts to quantify the economic dependence on nature – as one aspect of addressing this failure – are growing. The financial system can both contribute to the depletion of biodiversity and promote its conservation and sustainable use.

The study group will explore whether and how central banks and supervisors can, within the remit of their mandates, play a role in addressing the challenge of biodiversity loss itself and the knowledge gaps around it, from assessment and monitoring of the relationship between biodiversity loss and financial stability to considering if central bank portfolios should include conservation goals. Applying a ‘double materiality’ approach to
biodiversity loss could be particularly insightful. Nature related hazards can affect companies and financial institutions, but companies and financial institutions can also affect biodiversity and the climate. This suggests
that a comprehensive approach to risk management should account for how financial institutions are exposed to biodiversity-related financial risks, but also how they contribute to such risks.