An organisation representing eight central banks has issued guidance on how financial institutions can approach nature-related risk.
The Network for Greening the Financial System released a conceptual approach for central banks and supervisors to better understand nature-related risks, on Thursday.
“Central banks and supervisors have clear reason to be concerned and involved as economies and financial sectors are not isolated from these existential challenges,” said the authors.
“The degradation of nature, and actions aimed at preserving and restoring it, can have material macroeconomic, macroprudential, and microprudential consequences.”
The Network for Greening the Financial System (NGFS) is a membership organisation comprising eight central banks from China, England, France, Germany, Mexico, the Netherlands, Sweden, and Singapore.
The guidance outlined a three-phase framework for banks to follow, identifying sources of physical and transition risk, assessing economic risks, and assessing risks within and to the financial system.
While climate risk is the starting point for understanding nature-related risk there are a number of specific nature-related dimensions that banks must account for and prepare for, the report said.
For example, nature is a spatially explicit risk factor that is local in scale and may compound its effects in other ecosystems should neighbouring ecosystems and assets fail due to degradation.
The major risk to the financial system is that nature degradation and related policies can leave assets stranded, and lead to a long-term loss of economic productivity making credit repayments more volatile, the report contended. As well, financial institutions themselves have regulatory, reputational, and litigation risks if they finance companies that contribute to nature loss, such as deforestation.
Central banks and supervisors should take action to assess dependencies and impacts on financial risk at the earliest opportunity, the report said.
“While this framework is a starting point for analysis and action, the lack of absolute certainty and perfect knowledge should not prevent central banks and financial supervisors from acting now on nature issues,” said the Taskforce on Nature-related Financial Disclosures (TNFD) in a comment on LinkedIn.
Financial institutions are becoming increasingly cognisant of the reputation and financial risks posed by nature and biodiversity loss.
Earlier this month, the European Securities and Markets Authority (ESMA) announced that biodiversity was a new frontier in financial monitoring raising concerns about its potential for greenwashing due to inherent complexity.
By Tom Woolnough – tom@carbon-pulse.com
** Click here to sign up to our weekly biodiversity newsletter **
