An executive board member of the European Central Bank (ECB) has defended the institution’s exploration of the economic impacts of biodiversity loss, arguing that understanding the threats is critical for the economy and “not some kind of flower power” exercise.
Frank Elderson told the Financial Times that the ECB’s first major investigation into the financial risks associated with environmental degradation revealed that 72% of eurozone companies and three-quarters of bank loans in the region are exposed to biodiversity loss.
“This is not some kind of a flower power, tree-hugging exercise … This is core economics,” he said, according to the paper.
Elderson challenged critics who accuse the ECB of exceeding its mandate and diverting attention away from its primary responsibility of managing inflation, and argued that even if concerns about the planet or biodiversity were disregarded, the economic implications would remain the same.
According to the ECB’s research, which studied 4.2 million companies in the eurozone, the vast majority rely on at least one “nature-related service” such as pollination, clean water, healthy soil, timber, or sand.
The central bank contends that disruptions to these services, such as the diminishing insect populations vital to crop pollination, can affect supply, influence prices, and potentially impact monetary policy, price stability, and inflation.
The ECB has been pressuring banks to address biodiversity loss risks and last year noted that 40% of eurozone banks had not properly evaluated their exposure to nature-related risks.
Some banks have begun to allocate capital for environmental threats in their internal risk assessments, and Elderson suggested the ECB would use “carrots and sticks” to incentivise others to follow suit.
These efforts are part of a broader trend of central banks worldwide assessing economic and financial risks associated with environmental degradation.
Besides the obvious overlap with global warming, Elderson pointed out that some aspects of biodiversity loss, such as flooding risks from mangrove forest reduction, are distinct from climate change.
Similar assessments have been conducted in France, the Netherlands, Brazil, Malaysia, and Singapore, with the Bank of England preparing a report on potential financial risks from nature loss.
But the US appears to be one of the outliers here, at least on climate change, with Federal Reserve Chair Jay Powell promising to “stick to our knitting” and not become a “climate policymaker”.
news@carbon-pulse.com
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