Whole Financial System Needs to Work Against Biodiversity Risk

NGFS-INSPIRE Study Group outlines data, analytics challenges for central banks and financial supervisors. 

A “whole-of-financial-system” approach is needed to successfully mitigate the risks posed by biodiversity loss, according to a new report providing guidance for central banks and financial supervisors.

It was co-authored by a study group from the Network for Greening the Financial System (NGFS) and INSPIRE – a research group co-hosted by the ClimateWorks Foundation and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science (LSE).

The UN Biodiversity Conference (COP15), the first part of which will take place next week, will finalise the Global Biodiversity Framework (GBF), which is expected to “catalyse broader reflection in the central banking and supervisory community of the role that they could play across their mandates”, the report said.

The draft GBF calls on policymakers to “ensure that all activities and financial flows are aligned with biodiversity values”, across its three pillars: reducing threats to biodiversity; meeting people’s needs through sustainable use and benefit sharing; and developing mainstream tools and solutions.

“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,” said Nick Robins, Professor of Practice at the Grantham Research Institute.

The joint NGFS-INSPIRE Study Group on Biodiversity and Financial Stability was established to help central banks and financial supervisors fulfil their mandates in the face of financial risks posed by continued biodiversity loss.

Challenges ahead 

The group’s report outlines four steps central banks and financial supervisors can take to ensure a “whole-of-financial-system” approach: building skills and tools; assessing the biodiversity-related dependencies and impacts of their financial institutions; issuing guidance to the financial institutions they supervise; and supporting government efforts to reverse biodiversity loss.

However, central banks and regulators face “considerable challenges” in understanding and responding to biodiversity-related risks, relating to data, methodologies, tools and capacity, said Dr Ma Jun, Chair of the NGFS Workstream on Research and Special Advisor to the Governor of the People’s Bank of China.

Data fragmentation remains a big challenge for the financial sector, the report noted, adding that relevant biodiversity-related data may already exist but not be publicly accessible. Government agencies, universities and other third parties which may hold such data should cooperate with investors to eliminate data fragmentation, the report suggested.

Further, existing metrics, tools and databases are not designed for central banking or supervisory purposes, such as forward-looking analysis needed for stress testing. “While this does not render them irrelevant for such purposes, these tools will need to be adapted to serve the needs of central banks and financial supervisors,” the report said.

Transition pathways such as the NGFS’s climate scenarios allow for forward-looking analysis of climate-related transition risks, but such scenarios have not yet been established in the biodiversity space.

Nonetheless, initiatives such as the Task Force for Nature-related Financial Disclosure (TNFD) are set to bring more convergence in the range of metrics, tools and databases used by the financial system to assess biodiversity-related risks.

“There is also significant potential for bodies such as the NGFS to help central banks and financial supervisors cooperate in addressing these challenges,” Jun noted.

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