Cop26: central banks have overlooked nature risks says Elderson

November 2, 2021|Written by David Clarke|Bank of Italy, Banque de France, Bundesbank, European Central Bank

Forest and nature risks have remained too much in the shadow for central banks and supervisors, Frank Elderson, chair of the Network for Greening the Financial System (NGFS), said in a panel discussion at the Cop26 summit on Tuesday.

Elderson, who also sits on the board of the European Central Bank (ECB), said that while policymakers have made substantial progress in developing climate scenarios and other climate-related tools, nature risks have not yet received the same attention. He highlighted the work the NGFS is doing to address this disparity.

“We and the financial institutions that we supervise need to become at least as expeditious on nature-related risks as we are on climate. Reaching net zero and saving nature requires the right combination of urgent, concrete and decisive governmental policies, and a financial system aligning itself with these policies,” he said. “Forests and finance are more intricately intertwined than ever, and only together can they thrive.”

Elderson was speaking in the aftermath of a landmark deal by over 100 world leaders to end deforestation by 2030.

The NGFS has established a study group to review how biodiversity and nature risks can be integrated into a range of central bank functions, including stress testing, asset purchases, and macroprudential instruments. The group is expected to publish its final report in early 2022.

Elderson and his colleagues from national central banks in the eurozone came to Cop26 able to boast more progress on addressing climate risk than most of their G20 counterparts. In the latest scorecard from Positive Money and Green Central Banking, the Banque de France, ECB, Banca d’Italia and Bundesbank are among the best performers, ranking first, fourth, sixth and seventh respectively.

All central banks in the eurozone are boosted by the ECB’s climate action plan and consideration of climate capital rules and bank portfolio restrictions. If implemented, these prudential policies would be the first climate actions classed as ‘high impact’ of any G20 central bank or supervisor.

But on nature and deforestation specifically, Elderson perhaps spoke with less authority. A study published in July found that over 70% of corporate bonds held by the ECB are potentially associated with high or very high negative impacts on biodiversity.

The UCL IIPP report found that the ECB is invested in 22 companies that are highly influential in forest risk commodity supply chains, such as palm oil, soybeans, timber products and beef.

While the ECB has said it will adapt its corporate bond purchases and collateral framework in light of climate considerations, it has yet to make such a commitment with respect to nature-related risks.

This page was last updated November 2, 2021

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