Financial authorities “are at different stages of evaluating the relevance of biodiversity loss and other nature-related risks as a financial risk”, according to a stocktake of various financial authorities’ initiatives on the issue published by the Financial Stability Board’s (FSB).
The stocktake, which will be delivered to G20 finance ministers and central bank governors in Rio de Janeiro at their meeting over 25 and 26 July, describes not only supervisory and regulatory initiatives, but central banks’ and supervisors’ analytical work on whether and how nature degradation, including loss of biodiversity, is a financial risk.
It also draws on a survey of participating FSB members and the work done by international organisations, including the conceptual framework developed by the Network for Greening the Financial System (NGFS), and work done by the Organisation for Economic Co-operation and Development (OECD) – funded by the European Union – on nature-related risks.
Klaas Knot, FSB Chair, commented: “While some jurisdictions have already undertaken initiatives to address nature-related financial risks, including promoting firm-level disclosures as a crucial aspect of risk management, there are challenges associated with data and analytical approaches for quantitative assessments. This report contributes to international discussions on whether, and if so how, nature degradation, such as biodiversity loss, is a relevant financial risk.”
According to the report, approaches to evaluating biodiversity loss and nature-related risks vary, in part due to differing mandates. Some authorities “have already concluded there is a material financial risk, while others remain at the stage of monitoring international work on the issue”. Meanwhile, a few authorities have decided not to work on this topic, due to data gaps and the need to give sufficient priority to climate risks (where analytical thinking and data are further progressed).
Financial authorities that are analysing the issue categorise nature-related risks into the same two types of risks typically used in climate-related financial risk analysis: physical and transition risks. However, analytical work faces major data and modelling challenges.
Authorities’ work to date indicates that financial institutions face large exposures to physical risk via their investments and financing activities, but that analytical work “needs to be further developed to better translate estimates of financial exposures into measures of risk”. Authorities also recognised the strong connections between climate risk and nature, and that more needs to be done to develop a more holistic approach that considers interdependencies between climate- and nature-related financial risks.
Regulatory and supervisory work is also at an early stage globally, the report continued, and approaches differ considerably across jurisdictions and institutions. That said, a number of authorities from both emerging markets and advanced economies already have regulatory and supervisory initiatives underway.
The report highlights examples of approaches taken by international organisations and authorities, with general recognition that more expertise is needed in the supervisory community, in central banks and in the private sector to understand and, where needed, address nature-related risks. Given this, a number of capacity building initiatives are underway from around the world.
Lise Pretorius, chief sustainability analysis officer at Matter, added: “This report highlights that while regulatory authorities’ recognition of nature risk is not uniform, and is in some ways still in its infancy, nature as a financial risk is clearly on the global regulatory and supervisory agenda.
“Climate and nature are so deeply intertwined that we cannot separate them, and we see the recognition of the work still to be done on data, methods and scenarios as positive: as with climate, financial authorities play an important role in guiding the development of frameworks and approaches risk assessment. At the same time, firms and financial institutions are in many cases already going beyond regulatory expectations on nature, as we have seen with growing global TNFD adoption.”
