Central banks and financial regulators have made progress in integrating our dependence on the natural world into their policy frameworks, yet the climate and nature crises continue to mount.
Previous work by myself and colleagues has shown how finance flows to actors linked to forest loss in critical but vulnerable ecosystems. Building on this research, we now show how central banks can use tools already available to them to target these financial flows that are contributing to systemic nature-related risks.
Pressures on nature increase systemic threat of ecosystem collapse
Ecosystem degradation is already creating physical risks for many economies and financial institutions. Continued human pressures such as deforestation and climate change could lead some globally important but highly vulnerable ecosystems to cross tipping points in the coming decades: non-linear, self-amplifying and potentially irreversible shifts in their state with cascading socioeconomic consequences for the millions that rely on them.
For example, interactions between climate change and forest loss could cause the Amazon rainforest to partially die back to form a savannah, with huge implications for climate change, global weather patterns and regional energy security.
Leading economic policy institutions including the IMF and the ECB recognise that the collapse of systemically important ecosystems would have far-reaching impacts relevant to financial and price stability. However, there is rising acknowledgement that current approaches aiming to price and disclose nature-related financial risks are insufficient to mitigate these worst-case outcomes.
Targeting the role of financial institutions
Considering these challenges, central banks must explore how the tools available to them can proactively contribute to reducing systemic environmental risks. This includes directly targeting contributions to the build-up of these risks from within the financial systems that they regulate.
Access to finance can shape the direction of economic activity. Focusing on new financial flows to actors degrading specific ecosystems is therefore a possible leverage point. Given their uncertainty but systemic consequences, ecosystems facing tipping points are an obvious place to start.
Our research focused on several relevant cases: the Amazon rainforest in Brazil; boreal forests in Canada and Russia; and mangroves and tropical peatlands in Indonesia. We developed a methodology to map the geographies, asset classes, and financial institutions involved in financial flows to actors linked to land-use pressures in these ecosystems. Land-use change and degradation (from economic activities such as agriculture, forestry, and aquaculture) is the major driver of tipping points in these ecosystems, alongside regional climate change.
Our findings have several important implications for central banks and financial regulators exploring this policy approach. We found that the key jurisdictions hosting the headquarters of financial institutions were often far from where ecosystems are located, highlighting potential accountability gaps requiring international coordination to resolve, as well as cross-border risk transmission channels that may currently be overlooked.
For example, in the Brazilian Amazon and boreal forests in Canada and Russia, upwards of 80% of financial flows were provided by financial institutions headquartered outside of ecosystem-hosting countries. However, in Indonesian mangroves and tropical peatlands, Indonesia itself and the surrounding region played a more significant role.
While bank lending was most prominent, it was not the only key channel. Bond facilitation accounted for 16-47% of financial flows, indicating that policy efforts must consider securities underwriting by banks and institutions outside the banking sector.
Most financial flows had no specified use-of-proceeds, suggesting a need to focus on counterparties rather than specific assets linked to deforestation. Counterparties’ wider corporate groups also need to be considered as financial flows were typically channelled through ultimate parents or financial subsidiaries.
Finally, globally systemic important banks (GSIBs) played a central role in most ecosystems, accounting for up to 65% of financial flows in the case of the Brazilian Amazon.
Retooling financial and monetary policies
This research can inform policy action by central banks and financial regulators since it highlights major jurisdictions that need to engage in this effort, considerations around coordination, and the entities and asset classes that likely require scrutiny. Our data is most relevant for macroprudential policymakers, who have a clear mandate to target these financial flows since: by partially enabling land-use pressures in these ecosystems to persist, they indirectly contribute to the build-up of systemic environmental risks.
Financial and monetary policies have allocative and signalling effects that could help steer financial flows away from these activities, by targeting the cost and availability of capital for companies linked to nature loss in these ecosystems. Within macroprudential policy, capital buffers – if set at sufficiently high levels in a dynamic, individualised, and narrowly targeted manner – could materially impact the financing conditions of targeted companies. Restrictive borrower-based measures would complement this. GSIBs could also receive a specific penalising factor given their prominence in our data.
Central banks should also avoid contributing to the build-up of systemic environmental risks through their monetary policy and other operations. Crucially, adapting monetary policy tools also starts to target sources of financial flows beyond bank lending. For example, excluding corporate securities from collateral frameworks and asset purchase portfolios can meaningfully affect market demand, asset prices, and subsequently, borrowing conditions for their issuers.
Central banks will also need to consider placing direct limits on financing to companies contributing to nature loss in these ecosystems, across bank lending and underwriting and alongside portfolio restrictions on primary market purchases for other types of financial institutions. This may become necessary should incentive-based policies not sufficiently pass through to financial and firm behaviour, especially given the urgency posed by some tipping points.
Implementation considerations
Central banks and financial regulators can act on these financial flows within their current mandates to help protect financial and price stability from the threats of ecosystem degradation. However, to ensure positive synergies with environmental and economic policies activating their tools in this way will likely require greater coordination with governments than is currently the case in many jurisdictions.
The availability of substitute pools of finance from other jurisdictions and parts of the financial system could also weaken policy effectiveness. Central banks can minimise this by targeting multiple types of financial institutions and asset classes, while coordinating internationally to prevent finance leaking to other jurisdictions.
Central banks must also ensure that policy implementation does not inhibit meaningful transition at the corporate and sovereign level. The former could be addressed via stringent scrutiny of transition plans of counterparties’ corporate groups, in coordination with other authorities, building on the precedent of issuer-level climate scrutiny set by the European Central Bank in its corporate bond purchase portfolio.
At the sovereign level, central banks – particularly those in high-income economies – must consider how targeting these financial flows may exacerbate macroeconomic constraints faced by ecosystem-hosting countries. Many already face structural macrofinancial disadvantages that indirectly encourage ecosystem degradation.
Alongside carefully balancing these factors when targeting “nature negative” financial flows, high-income central banks should also explore how to support nature transition strategies in ecosystem-hosting countries, for example by including their sovereign green bonds within collateral frameworks.
Leadership in a fragmented world
While far from a silver bullet, integrating this ecosystem-based approach into central banking frameworks can play a meaningful role in addressing contributions from within the financial system to systemic environmental risks, starting with those regions facing tipping points. International coordination – reversing current trends in global cooperation – is key to maximise this approach.
However, our research suggests that jurisdictions still committed to addressing nature-related economic and financial risks, particularly the EU, could already play a meaningful leadership role, in coordination with ecosystem-hosting countries.
This page was last updated September 18, 2025
Written by
Lydia Marsden is a research fellow in sustainable finance at University College London’s Institute for Innovation and Public Purpose.
