NGFS publishes conceptual framework for nature-related financial risk

The Network for Greening the Financial System (NGFS) has released a nature-related financial risk framework. Launched last week at a high-level event at Banque de France, the guide seeks to create a shared science-based understanding and language of nature-related financial risks to aid central banks and supervisors navigate the challenges of addressing such risks.

The report explains that the degradation of nature has material macroeconomic, macroprudential and microprudential consequences. Ravi Menon, chair of the NGFS said: “Along with the climate crisis, the degradation of nature is an existential threat facing our planet. Addressing nature-related risks and its broader implications for the financial sector is no longer just prudent – it is an imperative. Finance can be a powerful force for helping to bend the curve of nature degradation.”

The event assembled over 200 representatives from NGFS members and observers including François Villeroy de Galhau, governor of the Banque de France, and Frank Elderson, executive board member of the European Central Bank.

Klaas Knot, president of De Nederlandsche Bank, expressed concern that the position of central banks as the preservation of financial stability is an “illusion” if the degradation of nature continues. As central banks contribute to this degradation through finance, it is “squarely within our mandate to address these risks and to use our leverage to bend the curve. From nature degradation to nature restoration,” Knot said.

Taking stock of previous work by the joint NGFS-Inspire study group on biodiversity and financial stability, the framework seeks to:

1. define nature-related financial risks as well as related concepts needed for a high-level understanding of those risks;
2. offer a framework to help central banks and supervisors identify and assess nature-related financial risks. The principle-based risk assessment framework consists of three phases: identifying sources of physical and transition risks; assessing economic risks; and assessing risk to, from and within the financial system;
3. outline the next steps to be taken by the NGFS taskforce, including bridging the modelling and data gaps (notably on the development of nature-related scenarios), and using emerging datasets to support alignment of policies on environmental sustainability and inform assessments of nature-related financial risks.

The taskforce aims to supplement the framework by providing illustrative case studies before mid-2024. The next task, the report says, is to bridge modelling and data gaps that emerge from the framework. One notable gap is the need for scenarios that facilitate forward-looking risk assessments of nature-related financial risks.

The launch comes shortly after a 27-strong coalition launched the Nature Positive Initiative which seeks to halt and reverse biodiversity loss by 2030. According to the organisations involved, the initiative’s overriding objective is to “drive alignment and synergies across a multitude of actors who will advocate, support and implement actions towards a nature-positive outcome of halting and reversing nature loss by 2030”.