Basic environmental and social risks still unaccounted for by central banks and financial supervisors

January 4, 2024|Written by Maud Abdelli
A person in green work clothes stands in the middle in the muddy ground of a mangrove forest
Restored mangrove forest in Ukunda, Kenya. © Anthony Ochieng / Climate Visuals Countdown

Our planet needs nature to survive, and so does our financial system. Increasing biodiversity loss represents serious environmental and social risks to the stability of our price and market economy. With over half of the world’s GDP heavily dependent on functioning natural ecosystems, nature loss not only directly affects companies and industries (for example, through supply chain disruptions), but also impacts communities who depend on fragile natural resources for their livelihood.

Findings from WWF’s latest annual assessment – the Sustainable Financial Regulations and Central Bank Activities or Susreg report, which tracks progress on the integration of environmental and social risks in central banking and supervision activities in 47 countries – show that since our first assessment in 2021, several central banks, financial supervisors and regulators are making notable progress.

We can see that some central banks and supervisors are starting to take into account nature-related financial risk disclosure in their activities, following sector-specific guidance from the Taskforce for Nature-related Financial Disclosures (TNFD) in the field of agriculture, aquaculture, forestry, mining, oil and gas, utilities, chemicals and pharmaceuticals sectors. Banque de France, for instance, has started to measure and disclose the impact of its own portfolios and pension fund on biodiversity, such as the total biodiversity impact, biodiversity footprint, and weighted average biodiversity ​intensity of their equity portfolio.​

A number of financial supervisors in emerging countries are also showing exemplary progress in greening their financial supervision policies, including Malaysia, Brazil and Thailand. The Bank of Thailand is now developing a sustainable taxonomy which provides a traffic ​light system defining “green, amber and red” activities, including criteria and thresholds. ​

However applaudable this progress may be, the majority of large economies are not taking sufficient action in transitioning to a financial system that is net zero, protects nature and does not leave vulnerable communities behind.

Sustainable policies fall short

Most countries are focusing primarily on climate risk with some positive developments on the financial supervision front, like growing requirements for financial institutions and corporations to disclose their climate transition plans. But broader environmental and social risks are largely falling behind. Even countries with the necessary resources to finance the transition show insufficient progress.

Indeed, 68% of high-income countries have yet to adopt strong enough climate and environmental banking supervision policies. And despite their significant contribution to the rise in global temperatures, some of the highest emitting countries have not put in place sufficient climate-related banking and insurance supervision policies.

Sustainable banking and insurance supervision policies are also falling short in the most biodiverse countries of the Asia-Pacific and Latin America, leaving them highly exposed to nature-related risks. Diverse species and ecosystems are essential to maintaining valuable services on which our economy and society are so dependent. This underscores the importance of central banks and financial supervisors in protecting the financial sector and wider economy from these risks.

As for greening central banking monetary policies, apart from the European Central Bank which is leading the way, very few central banks integrate environmental, let alone social, aspects into their monetary toolkits.

Nature and climate should go hand in hand

Change is possible. But central banks, supervisors and regulators need to play a more important role in steering the financial sector toward sustainability by prioritising the most impactful measures that deliver the biggest results. Protecting nature is integral to effective climate action. Minimum environmental and social policies in central banking and financial supervision are essential to put the entire financial sector on the right track.

At the recent Cop28 climate summit, countries agreed to transition away from fossil fuels, but failed to commit to their phase-out or to prioritising the protection of nature. The challenge of raising ambitions on combined climate-nature action, including delivering on the landmark global biodiversity framework agreed in 2022, now falls in part on financial institutions.

Directing finance away from the most harmful activities like coal, gas and oil, will be crucial in the transition to a low-carbon economy. Phasing out the most harmful sectors from central bank portfolios and imposing higher capital requirements on financial institutions’ lending to, investing in and insuring companies with always environmentally-harmful activities are bold measures that will make real impact. Instead of waiting for the perfect data and models, preventive and impactful measures are the only way forward in the face of uncertain and growing catastrophic environmental events.

We don’t have much time left. Governments, central banks, financial supervisors and regulators must take bolder action and create a conducive environment for a green, fair and just transition in which no one is left behind.

This page was last updated January 9, 2024

Share this article