NGFS on Addressing Financial Stability Issues from Biodiversity Loss
The NGFS Study Group on Biodiversity and Financial Stability published a Vision paper exploring the case for action in addressing the financial stability concerns arising from biodiversity loss. The report notes that central banks and prudential supervisory authorities are increasingly recognizing the potential for biodiversity loss to threaten macroeconomic stability as well as the stability of the financial systems that they oversee. However, the complexity of the issue, the lack of regulations and policy guidance, and the limited tools to measure, disclose, and manage nature-related financial risks create a range of challenges to overcome.
The paper sets out links between the biodiversity loss and the macroeconomic and financial systems, also considering the impact of the financial sector in exacerbating the degradation of natural systems. It then poses a series of questions regarding whether and how central bankers and supervisors should, in the context of pursuing their mandates, address the issue of biodiversity loss. The paper points out that, given the scale of both the challenge of biodiversity loss and the knowledge gaps around it, a strategic and structured approach by central banks and financial supervisors is needed. The Study Group plans to explore the potential role of central banks and supervisors across a range of functions, including the following:
- Looking at the role of financial authorities in assessing the relationship between biodiversity and financial stability and exploring whether the traditional methods adequate (such as stress testing) are adequate
- Identifying what key biodiversity indicators should central banks and supervisors be monitoring, evaluating and reporting on and what disclosure they should require from regulated entities
- From the micro-prudential perspective, reviewing whether and how biodiversity factors can be included in routine activities to assess the safety and soundness of financial firms and what role might scenario-based tools play in analyzing and stress-testing biodiversity risk exposures
- Investigating the incorporation of biodiversity risks into macro-prudential policy frameworks and instruments
- Reviewing whether and how central banks and supervisors should support the scaling up of innovative financial tools to help support biodiversity and strengthen financial stability
The Study Group would welcome feedback on the initial approach set out in this Vision document and would welcome suggestions or examples of research and analysis that can help to deepen its thinking. Based on this as well as its own research, the Study Group will publish an interim report ahead of COP15 Convention on Biological Diversity in October 2021 and this report will be open for further feedback. The Convention is expected to agree on a post-2020 global biodiversity framework, which aims to halt and reverse biodiversity loss. The study group will publish its final report in February 2022, along the the research agenda for the following years.
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Keywords: International, Banking, Climate Change Risk, ESG, COP 15, NGFS, Biodiversity Loss, Financial Stability, Stress Testing, Macro-Prudential Policy, Micro-Prudential Policy, NGFS
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