© Anastasia Mezenina
Financial regulators may be overlooking nature-related risks such as biodiversity loss and deforestation due to a lack of adequate data, a report from the Financial Stability Board (FSB) has found.
The G20 watchdog said that many regulators are instead focusing on climate risks, while those that have assessed nature-related risks found it could result in significant financial losses to financial institutions.
Some regulators have even opted not to work on nature-related risks due to data gaps and modelling challenges, the FSB found.
Authorities that have analysed nature-based risks tend to look at both physical and transition risks. Physical risks arise from the degradation of nature, such as a decline in pollinating insects, while transition risks result from actions and policies taken to protect nature. Both risks are likely to impact the economy and the financial system through credit, market and operational risks.
There is also growing concern about insurance underwriting risk and that an increase in claims could lead to an insurance gap if it leads to a reduction in insurance availability.
Financial institutions face large exposures to physical risk due to their investment and financing activities related to nature, but more work is needed to determine the estimates of financial exposure to such risk.
The World Bank has estimated that global GDP could be reduced by as much as 2.3% in 2030 if there is a partial collapse of ecosystems.
The FSB noted that regulators are starting to recognise the connection between climate risk and nature and that more needs to be done to create a holistic approach that takes into account the interconnections between the two.
Many regulators also acknowledge that more expertise is needed among supervisors, including central banks and the private sector, to understand and address nature-related risks. Some are conducting further work to better understand and mitigate them.
For example, the Banque de France is carrying out an assessment on the impact of biodiversity on its non-monetary policy-related portfolios, while the Australian government is working to develop national targets in line with the global biodiversity framework. Meanwhile, the Netherlands central bank conducted the first assessment of nature-risk exposure on its own portfolios.
The FSB said that ongoing work among international organisations to provide guidance on nature-related disclosures and risks, “will contribute to further developing authorities and firms’ understanding of nature-related financial risks and of regulatory and supervisory approaches in the coming years”.
This page was last updated July 30, 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.
