NGFS widens nature risk research as central banks grapple with biodiversity threats

Key points

• The NGFS is expanding research into how nature degradation and biodiversity loss affect inflation, financial stability and macroeconomic outcomes, with water availability identified as an early priority topic.

• The network will recruit nature scientists and modellers from academia to build evidence-based frameworks for modelling nature-related risks.

• Integration of nature considerations into central bank mandates remains a domestic decision, with the NGFS strategy targeting high-impact gaps including physical risks, adaptation and nature-related financial implications.

A coalition of over 150 central bankers is expanding its research into how nature-related risks affect inflation and financial stability.

“We need to do what we did with climate – assess the systemic risks and the materiality – but we are just at the beginning,” Yann Marin, Secretary General of the Network for Greening the Financial System (NGFS), told Green Central Banking.

The NGFS released a nature risk toolkit in April, which included several guides for central banks, including clarifying how nature falls within supervisor’s mandate and how to integrate nature-related risks into transition plans.

The overall goal is to build greater awareness and expertise on the effects of nature degradation and biodiversity loss on the financial system, so central banks have practical tools to incorporate into their own workstreams. The availability and accessibility of water is one of the first global nature topics the NGFS will be looking at, Marin confirmed.

The development comes as the NGFS’ strategy shifts to target “high-impact areas and topics where gaps in understanding remain,” including physical risks, adaptation, and nature-related risks.

The network intends to do this by focusing on three priorities: technical incubation; scenario expertise; and capacity building.

“The strategy rightly recognises that biodiversity loss and ecosystem degradation can have material macroeconomic and financial implications through impacts on productivity, supply chains, inflation, asset valuations and financial stability,” says Monomita Nandy, professor in accounting and finance at Brunel University of London.

The extent to which climate and nature factors are embedded into central banks’ own practices will remain, however, a domestic decision. The NGFS highlights that any integration of climate and nature considerations into regulatory and monetary frameworks needs to happen in accordance with its members’ “respective mandates”, which can differ significantly.

For instance, the use of prudential transition plans is one policy tool where central banks show divergence, with so far only the European Central Bank making them mandatory.

Bringing in biodiversity and nature experts

The NGFS also intends to build out its frameworks by recruiting nature scientists and modellers from academia to help it model nature-related economic and financial risks. 

The experts will advance NGFS’ evidence-based technical work on how nature degradation and biodiversity loss affect macroeconomic outcomes and any potential implications for monetary policymakers.

Nandy from Brunel University says academic researchers can make valuable contributions by combining interdisciplinary expertise in economics, finance, ecology, geography and environmental science.

She is encouraged by NGFS’ commitment to maintain scientific credibility while translating technical research into usable supervisory tools, which should help narrow the gap between research and policy practice.

Marin says one issue being discussed within the NGFS is whether nature modelling should be a standalone exercise or if it should be integrated within NGFS’ existing climate scenarios. Given the complexity of the topic, nature risks will probably be first modelled separately, with any fully-fledged scenarios requiring a few more years of in-depth work before being published, he says.

Hanna Fiegenbaum, a guest researcher at Leipzig University and external advisor on nature credit markets for the European Commission Joint Research Centre, agrees a standalone modelling exercise for nature is necessary as it also reflects separate reporting and measurement standards that are already available.

“Nature-related risks are not simply an additional module of climate-related risks. They have specific drivers, their own spatiotemporal dynamics, transmission channels operating at different spatial scales, distinct thresholds, causal chains and their own data requirements,” she says.

Fiegenbaum adds, however, that the interacting downsides of climate- and nature-related risks, and the multidimensionality and non-linearity of the relationship between them also need to be considered. She argues this is necessary because climate- and nature-related risks are not disconnected but related across multiple dimensions, with potential positive interactions also seen as an opportunity to adapt to and mitigate climate risks.

Nandy from Brunel University makes a similar point, saying that, in the longer term, the ultimate objective should be an integrated framework that captures climate and nature interactions and their combined impacts on macroeconomic and financial outcomes.

“This would avoid treating climate and nature risks as separate silos and provide a more realistic assessment of systemic risks,” she argues.

Where appropriate, the NGFS is also open to collaborating with international standard-setting bodies on climate-and-nature-related risks to strengthen the resilience of the global financial system.

Last year, it started a collaboration with the Coalition of Finance Ministers at COP30 in Brazil, with an update expected ahead of COP31 in Turkey in November.

 

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