© Irina Shishkina
The Network for Greening the Financial System (NGFS) released its final guidance on assessing nature-related financial risks for central banks and regulators in early July.
“Biodiversity is under threat worldwide, making it essential for central banks, supervisors and regulators to understand nature-related risks to the financial system,” Sabine Mauderer, chair of the NGFS and executive board member of Deutsche Bundesbank said in a press release.
The final version is similar to the beta framework released in September but includes several case studies with real-world examples for regulators to reference.
The framework encourages central bankers to identify sources of physical and transition risks, prioritising sectors and ecosystems more likely to be at risk due to their dependence or impact on nature. Regulators should also consider compounding and cascading effects, as well as contagion to the financial system.
Once risks have been identified, financial regulators should assess the economic risks, including material economic risks from exposures. Regulators should consider the direct and indirect effects, the micro and macro effects, and substitutability.
Finally, central bankers should assess the potential financial risk from the exposure to physical and transition risks.
The NGFS framework notes that the risks on individual financial institutions have the potential to spread and “create feedback loops to the real economy,” such as rising food prices due to climate change causing a rise in interest rates and weakening bank balance sheets.
Some central banks have started to take note of the risks of nature along with climate risks. The Dutch central bank was the first bank to apply a locate, evaluate, asses and prepare (Leap) nature assessment on its portfolios.
Maud Abdelli, who leads WWF’s greening financial regulation initiative, welcomed the framework, saying it was a good starting point for regulators to take action.
“If you want to address the climate and nature crisis, you should focus on the key drivers of both climate change and nature loss,” she said.
She noted that the framework may be less relevant for central banks who have already advanced on nature risk and would like to see the NGFS introduce more specific operational guidance.
In a complementary report, the NGFS made note of emerging nature-related litigation trends, which it says are likely to evolve and grow due to increasing success from climate-related litigation cases. Some of the recent trends it identified include litigation around biodiversity loss, deforestation, ocean degradation, carbon sinks and plastic pollution.
The NGFS says regulators should closely monitor developments in nature-related litigation, as it could put pressure on the financial system. It sees a potential increase in the number of rights-based nature cases and corporate responsibility cases.
This page was last updated July 16, 2024
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
