Financial System Must Play Dual Role on Biodiversity

NGFS paper suggests applying a ‘double materiality’ approach to biodiversity loss, identifies knowledge gaps among central banks and regulators.

Not unlike the Hindu god Shiva’s power to destroy and create the world anew, the financial system contributes to the depletion of biodiversity but has the potential to also conserve and promote it. A new paper has urged central banks and prudential supervisors to take a “strategic and structured approach” to tackling the lack of knowledge about the scale and challenge of biodiversity loss.

Noting that the wider financial system recognises the impact of climate change on economic activities, the paper draws attention to the impact of the rapid loss of biodiversity, highlighting increasing awareness of the economic consequences.

Nascent attempts by the financial system to address biodiversity include the Finance For Biodiversity Pledge, to which 37 financial institutions have committed, the Taskforce for Nature Related Financial Disclosures, the Network for Greening the Financial System (NGFS, joint author of the paper) and De Nederlandsche Bank’s examination of the impacts and dependencies of its financial system on biodiversity.

The new paper lays the groundwork for a future study to establish an evidence-based approach to how central banks and supervisory authorities may need to consider biodiversity loss in the context of their mandates. The study will be conducted by a joint group of representatives of the NGFS and the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE).

Macroeconomic impacts to be studied

The study group will assess how the macroeconomic impacts of biodiversity loss – and the measures considered or taken to reverse it – could affect financial stability. The loss of biodiversity may pose financial risks to individual institutions as well as to the financial system as a whole, says the paper.

The paper suggests applying a ‘double materiality’ approach to biodiversity loss could be particularly insightful. “By facilitating economic activity, the financial system can both contribute to the depletion of biodiversity and promote its conservation and sustainable use,” says the paper. “The macro financial importance of biodiversity means that it could be strategically important for central banks and supervisors to understand these impacts, following the logic of double materiality.”

The study group will explore the potential role of central banks and supervisors across a range of functions including their role in assessing the relationship between biodiversity and financial stability, the biodiversity indicators they should be monitoring and reporting on, and the disclosures that should be required from financial institutions.

The study group is co-led by Dr Ma Jun, the Chair of the NGFS Research Workstream and Chairman of China’s Green Finance Committee, and Prof Nick Robins of Grantham Research Institute on Climate Change and the Environment. It comprises around 30 NGFS members and observers and around 25 INSPIRE researchers.

Scenario-based tools to analyse biodiversity risk

At the micro prudential level, the study group will assess which biodiversity factors should be included in routine activities to assess the safety and soundness of financial firms and the role scenario-based tools play in analysing and stress-testing biodiversity risk exposures.

The group will also look into how central banks and supervisors can provide independent assessment of biodiversity challenges to governments, identifying real economy and financial system reforms that could be required.

Based on feedback on the paper and the study group’s own research, an interim report will be issued ahead of the COP15 of the Convention on Biological Diversity in China during October. The interim report will be open for further feedback and the study group anticipates a final report will be published in early 2022, along with an agenda for further research.

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