Some G20 regulators have decided not to work on nature-related financial risks due to data challenges and the need to prioritise climate-related analysis, a report released on Thursday showed.
In its latest publication, the Financial Stability Board (FSB) investigated a list of initiatives led by financial authorities among G20 countries, including central banks’ and supervisors’ work on whether and how nature degradation and biodiversity loss represent financial risks.
According to the study, that will be delivered to the G20 meeting of the finance ministers and central bank governors in Rio, Brazil next week, the regulatory and supervisory process is at an early stage globally, with approaches differing considerably across jurisdictions and institutions.
While some bodies have already come to the conclusion that there is a significant financial risk, others are still in the stage of monitoring international efforts on the issue.
Moreover, some authorities are intentionally not working on the topic due to data gaps and challenges, stressing the need to prioritise climate risks, where data and analysis are more advanced.
The existing data gaps include a lack of granular and geospatial information on the regional dependency of economic activities on nature, as well as insufficient metrics to capture interdependencies between different ecosystems, FSB said.
NATURE-RELATED RISKS
According to the report, while there is no commonly agreed international definition for nature-related financial risks to date, some elements are emerging.
As biodiversity plays a key role in economic activities that rely on the so-called ecosystem services – such as clean water, flood protection, nutrient cycling, and pollination – nature degradation could result in credit loss, inflation, default, and increased insurance risks.
Credit loss will be particularly pronounced in specific sectors, including real estate, agriculture, and farming, the report highlighted.
According to the World Economic Forum, some $44 trillion of economic value generation – over half the world’s total GDP in 2019 – is dependent on natural capital.
A 2023 analysis by PwC updated this estimate, suggesting that 55% of global GDP, equivalent to around $58 trillion, is moderately or highly dependent on nature.
“Authorities that aim to manage nature-related financial risks stress that it needs to be set within a context of an overall strategy, extending beyond the financial sector, to manage nature degradation as a whole,” the FBS wrote in the report.
FSB also pointed out that the ongoing work of the Taskforce on Nature-related Financial Disclosures (TNFD) in providing guidance and recommendations, as well as the International Sustainability Standards Board’s (ISSB) planned work to research disclosure about risks and opportunities associated with biodiversity, will contribute to further developing the understanding of nature-related financial risks in the coming years.
“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,” Klaas Knot, chair at FSB, said in a statement via e-mail.
“This report contributes to international discussions on whether, and if so how, nature degradation, such as biodiversity loss, is a relevant financial risk.”
By Giada Ferraglioni – giada@carbon-pulse.com
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