NGFS Report Studies Impact of Biodiversity Loss on Financial Stability
The Network for Greening the Financial System (NGFS) made available an interim report that delves deeper into the challenges related to the assessment of links between biodiversity loss and the macroeconomic and financial systems. The report provides potential ways forward for central banks and financial supervisors to incorporate the derived insights in the exercise of their tasks. The report has been published by the joint Study Group on Biodiversity and Financial Stability, which the NGFS and the International Network for Sustainable Financial Policy Insights, Research, and Exchange (INSPIRE) had launched in April 2021. Following this interim report, the Study Group expects to publish a final report early 2022.
This report is the second output of the Joint NGFS-INSPIRE Study Group on Biodiversity and Financial Stability. The group comprises 30 NGFS members and observers, along with the 30 INSPIRE researchers from academia, civil society groups, and think-tanks. The report finds that there is growing evidence that biodiversity loss could have significant economic and financial implications, since the decline of ecosystem services poses physical risks for the economic actors that depend on them. This could also involve 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. This potential to contribute to the 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 that, to address this issue, central banks and financial supervisors can:
- Begin building the skills, capacities, tools, and cooperation to address biodiversity-related economic and financial risks
- Assess the dependencies and impact of their financial institutions on ecosystem services and biodiversity and become more familiar with the existing biodiversity-economy models; they could draw on scenario analysis or new systematic measures of financial institution dependencies and impacts as well as develop ad hoc methodological approaches to better capture the risk of impact cascading through economic and financial systems
- Signal, to the financial institutions that they supervise, other economic actors, and policymakers, the importance of understanding the risks arising from their dependencies and impact on biodiversity
- Support governments’ efforts (within their remit) 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
In addition to these recommendations, the report offers the first overview of emerging central bank activity in relation to the biodiversity issues and the consideration of the role the financial system might play in the proposed post-2020 Global Biodiversity Framework. This interim report sets the stage for a final report from the Study Group, which is due to be published in early 2022. That report will explore in further detail the linkages among the biodiversity loss, the macroeconomy, and the financial system, drawing on existing research and leading practices. The final report will more comprehensively consider options for central banks and financial supervisors to address the micro- and macro-prudential risks that biodiversity loss poses as well as set out a research agenda.
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Keywords: International, Banking, Securities, Insurance, Climate Change Risk, ESG, Financial Stability, Biodiversity Loss, Physical Risks, Transition Risks, Scenario Analysis, Stress Testing, NGFS
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