Biodiversity loss: a risky business for central banks

A sloth in Costa Rica’s Miravalles-Jorge Manuel Dengo National Park. WWF’s highlights the urgency for central banks and financial supervisors to act on the risk of unprecedented nature loss to which they are also exposed. (Keystone/EPA/Jeffrey Arguedas)

Climate change-related risks have risen higher on the radar for central banks across the world, however, those related to biodiversity loss are still largely ignored, according to WWF Switzerland.  The environmental organisation is calling on financial supervisors to take action.

In a report released last week, WWF warns that current practices of only integrating climate-related risks within their mandates fall short in ensuring a sustainable financial system. Risks related to biodiversity loss such as deforestation or overfishing also need to be taken into account.

“Climate and nature are two sides of the same coin,” said Maud Abdelli, initiative lead of WWF’s Greening Financial Regulation.

“Central banks and financial supervisors today have a unique opportunity to utilise mechanisms designed to address climate change-related risks and impacts to also tackle biodiversity loss. Only by addressing them together can they ensure a sustainable financial system,” she added.

Why it matters.  The world’s biodiversity is declining at record rate, with one million species now at risk of extinction. This poses dangers not only for the planet but also to the economy and the financial system.

A 2020 World Economic Forum report estimates that over half the world’s total GDP – around $44 trillion of economic value generation – is moderately or highly dependent on nature and its services and, as a result, exposed to risks from nature loss.

This in turn can impact financial stability. In India for example, close to 40 per cent of the gross credit exposure of Indian banks is in sectors where water risks are significant. 

Charlie Dixon, portfolio manager, Finance for Biodiversity, and one of the contributors to the WWF report, said:   “Just as biodiversity is crucial to the stability of the global economy, it is crucial to the stability of the global financial system.”

“Financial regulators have a duty on behalf of the private sector to examine the long tail risks and ensure they are prepared to respond,” he said.

Three ways central banks can take action. WWF Switzerland makes three recommendations for central banks.  First, they must assume that environmental degradation, including biodiversity loss, poses macroeconomic and financial risks in their jurisdictions unless it can be shown otherwise.

Second, early intervention and preventive measures should be taken to mitigate forecasted risks from biodiversity loss alongside climate change-related risks. The  current regulatory framework already provides the tools to do so, even if risks are still difficult to assess, says WWF.

Third, the actions of central banks and financial supervisors should be aligned with internationally and nationally-stated environmental goals.

“While central banks may not be only actor in the fight against environmental degradation, they are well-positioned to influence the behavior of the financial sector and the wider economy.”

News in brief. WWF’s report echoes the conclusions of the Dasgupta review, released earlier this year, on the economics of biodiversity and commissioned by the UK government, which called for nature to play a greater part of policymaking.

Last month, G7 countries and their environment minister acknowledged the mounting risks from biodiversity loss and backed the launch of an international Task Force for Nature Related Financial Disclosure (TNFD), which will develop a framework for corporations and financial institutions to report on nature-related risks.