Report: risks from nature loss not accounted for in central bank scenarios

December 20, 2023|Written by

Nature loss from pollution, deforestation, land-use change, and over-extraction of materials could cost the global economy upwards of US$5tn, a report from Oxford University’s Environmental Change Institute has found.

Yet these nature risks are not priced into financial markets or accounted for in scenarios used by central banks, which could leave the financial system “exposed to potential systemic risks, as well as contributing to the misalignment of capital flows with societal goals”.

Nicola Ranger, lead author of the study and a director at the Environmental Change Institute, said protecting nature was vital for the economy as well as an important part of adapting to climate change.

“Nature is not the elephant in the room, it’s the huge green scorpion running towards us. It’s not just about birds and butterflies, we are fundamentally eroding the natural capital upon which our societies and economies are built,” she said.

The study was conducted as part of the Network for Greening the Financial System’s taskforce on nature, which also released  recommendations for regulators and banks to develop scenarios to assess nature-related financial risks.

The Oxford study is meant to help central bankers and regulators develop scenarios for nature-related financial risks and to assess the scale of those risks.

The study focused on three main areas: water, pollution and pollination. It found that biodiversity loss and environmental degradation present long-term risks to the overall economy and society, with increasing risks from pandemics, floods, and droughts, soil erosion, water quality, and diminishing agricultural production.

For example, researchers found that risks related to water were the most prominent and could constitute 7-9% of global GDP, with the manufacturing sector the most at risk. Meanwhile, there is a 14-18% estimated risk of agricultural output from water-related risks and a 12% output risk from a decline in pollination. The risks could be amplified, “and act as a risk multiplier on climate change, leading to significant impacts on people and economies, as well as the global financial system”.

The researchers noted the need for regulators to manage nature risks. They recommend that central banks identify and address systemic issues and risks in line with the Taskforce on Nature-related Financial Disclosures, as well as identify any potential regulation gaps or inadequate oversight.

This page was last updated December 21, 2023

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