Biodiversity Loss and Climate Change Interactions

Financial Stability Implications for Central Banks and Financial Supervisors

August 26, 2022Published by Climate Policy

Financial policymakers need to think beyond silos and adopt an integrated approach towards managing climate and biodiversity-related financial risks, this paper published in the journal Climate Policy argues.

The authors warn that, by failing to acknowledge the interconnections between climate and biodiversity, efforts to assess such risks may be subject to blindspots and significant misestimations.

The report explores the links between climate and biodiversity loss with respect to both physical and transition risks. For example, it examines how climate impacts like shifting rainfall patterns can contribute to ecosystem degradation, which in turn affects the climate system including changes to the carbon, nitrogen and water cycles.

The paper says these nonlinear dynamics are largely neglected by environmental, social and governance frameworks, which for the most part simplistically aggregate estimations of risk factors without considering potential interactions between them.

Instead, the authors recommend that financial authorities should act on a precautionary basis to manage climate and biodiversity-related financial risks concurrently.

The report offers a series of recommendations as to how this could be achieved. It says policymakers should:

  • coordinate with relevant government departments to define business activities that are most harmful to climate and biodiversity, especially those contributing to ecological tipping points, such as activities linked to tropical deforestation, which will damage both domains;
  • require mandatory disclosure of portfolio composition, risk management and due diligence procedures relating to the financing of identified harmful activities;
  • use existing toolkits to discourage financing of such activities, eg by applying punitive capital requirements.

This approach may require greater coordination between central banks and other government departments in order to maintain democratic legitimacy and support existing central bank mandates, the report says.

The paper covers some of the same ground as an earlier publication on managing nature-related financial risks by the same authors.

This page was last updated August 26, 2022

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