Supervision of nature risks should mirror work on climate, says Elderson

Central banks should develop their management of nature-related risks to bring it into line with their work on climate, Frank Elderson has said. He was speaking at a webinar in his capacity as chair of the Network for Greening the Financial System (NGFS), following the publication of a new report.

When asked if the supervision of nature-related risks should ultimately have implications for banks’ capital requirements, Elderson concurred. He said that all material risks need to be mitigated, managed and adequately capitalised. “If we understand nature-related risks as being material risks, you have my answer,” he concluded.

The report, Central Banking and Supervision in the Biosphere, describes how biodiversity loss will have major economic implications. This is because the decline of ecosystem services poses physical risks for the economic actors that depend on them, while actors’ impacts on ecosystems leave them vulnerable to transition risks as the world moves to a nature-positive economy.

Central banks and supervisors should take note and respond accordingly, the authors argue. The paper contains a series of recommendations, including building capacity to understand nature risks, setting new supervisory expectations, and integrating nature risks into central bank operations, including monetary policy. They are broadly consistent with recommendations from the NGFS on climate risk, which have had a significant influence on how central banks around the world are addressing the issue.

Elderson said that much of the analytical framework for addressing climate risks can be transposed to apply in the nature context. He said that the two sets of risks are interrelated to a very significant extent, and that there was no principled reason why work on climate should necessarily be more advanced.

There are already signs that some central banks are looking to integrate nature considerations into their monetary policy operations. The People’s Bank of China may expand the coverage of its decarbonisation facility to include biodiversity-related projects, according to Ma Jun, special advisor to the bank’s governor.

Sylvie Goulard, deputy governor of the Banque de France, hinted that nature risks could be considered alongside the European Central Bank’s (ECB) plans to green its monetary policy portfolio. A report last year found that over 70% of corporate bonds held by the ECB are potentially associated with high or very high negative impacts on biodiversity.

Goulard also stressed that while there is a lot of similarity between nature-related financial risks and climate, there are some key differences. CO2 emissions can provide an overarching metric for climate, but there is no comparable measure of nature-related impacts. There is also less of an understanding of what the transition to a nature-positive world will entail, she argued.