© Adrian Petty / ECB
Nature degradation poses a risk to the economy and central bankers and supervisors should take note, European Central Bank (ECB) executive board member Frank Elderson said at a legal conference in early September.
Nature risk may not only cause material risk to the financial system but could have implications on price stability, one of the primary objectives of many central banks.
“From the perspective of central banks and supervisors, the degradation of nature makes our economies, our companies and our financial institutions increasingly vulnerable. We cannot ignore these vulnerabilities,” he said.
The ECB considers addressing climate change risks as part of its remit; the central bank’s secondary objective is to support the general economic policies in the EU, which includes its climate policy objectives.
Elderson said regulators should also be aware of potential nature-related litigation risk, as there has been an increase of corporations and banks being challenged. It has become easier for companies to be held liable, and cases are only likely to grow as new legislation comes into force, such as the corporate sustainability due diligence directive.
The continued degradation of nature may also increase the risk of a tipping point, or an irreversible and large-scale change in the ecosystem. These tipping points risk “going beyond the Earth’s safe operating space for sustaining life on the planet”.
While governments are responsible for addressing nature degradation, Elderson said it presents an economic risk that central bankers need to consider. An ECB research paper found that 72% of euro area companies are at risk of ecosystem degradation.
He noted that the ECB expectations for risk management at financial institutions already include the need for banks to identify, measure and manage nature-related risks. Some banks that have not put in place an assessment of climate and nature risks could face penalty payments if they fail to put remedies in place in time.
Elderson also noted that more research is needed to understand the extent of the potential effects of nature degradation on the economy.
“Economists must develop means to transpose insights from nature science into variables of economic interest like growth, inflation and financial risks.”
This page was last updated September 19, 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.
