Central Banking and Supervision in the Biosphere

Biodiversity loss represents a major threat to financial stability, and mitigation requires urgent transformative changes in our socioeconomic and financial systems, finds this paper from the Network for Greening the Financial System (NGFS).

The paper is the final report of a study group on biodiversity risk established with the Inspire research network. The report is a working paper, and its release was accompanied by a statement from the NGFS endorsing many of its key findings.

The authors argue that policymakers, including central bankers and financial supervisors, must develop comprehensive strategies to manage nature-related financial risks. These include risks related to the interactions between climate change and biodiversity loss, and to biodiversity loss resulting from other human pressures such as habitat degradation and over-exploitation.

The report describes how the decline of ecosystem services poses physical risks for the economic actors that depend on them, while actors’ impacts on ecosystems leave them vulnerable to transition risks as the world moves to a nature-positive economy.

The paper contains a series of recommendations, including building capacity to understand nature risks, setting new supervisory expectations, and integrating nature risks into central bank operations, including monetary policy. Speaking at a webinar accompanying the launch, NGFS chair Frank Elderson also said that the supervision of nature and biodiversity risks should ultimately have implications for banks’ capital requirements.

The recommendations are broadly consistent with recommendations from the NGFS on climate risk, which have had a significant influence on how central banks around the world are addressing the issue.