Quantitative Easing and Nature Loss

This pioneering report from the Institute for Innovation and Public Purpose at University College London is the first ever study of nature-related financial risks on a central bank’s balance sheet. It explores those risks in the European Central Bank’s (ECB’s) €310 billion corporate bond portfolio, and assesses the potential impacts on the natural world.

The study builds on a previous study of biodiversity-related financial risks by De Nederlandsche Bank and uses the framework developed by the Natural Capital Finance Alliance, Exploring Natural Capital Opportunities, Risks and Exposure (Encore). This tool maps 86 production processes in 11 sectors with 21 ecosystem services, identifying direct environmental dependencies and impacts and assigning a ‘materiality rating’ to each of 138 sub-sectors.

As the ECB does not release details on the volume of specific bonds held, authors Katie Kedward, Josh Ryan-Collins and Adrienne Buller constructed a simulated investable universe replicating the sectoral breakdown of the bonds eligible for ECB corporate asset purchases. Exposure to each NACE sector was then mapped to ecosystem dependencies and impacts using the Encore framework.

The results show that “the sectors the ECB is invested in are associated with significant negative impacts upon nature, especially with regards to use of land and freshwater, pollution and climate change – all of which are key drivers of biodiversity loss”.

Over 70% of the central bank’s corporate portfolio is potentially associated with drivers of biodiversity loss, while over 40% of the bonds held have a high or very high dependence on ecosystem services, particularly services involving water supply and quality, climate regulation, and protection from natural hazards.

However the true nature-related risk to the ECB’s corporate asset purchases – and the effects of these assets on nature – may be much greater. Pointing to complex interactions between ecosystems, climate and other natural systems, the report warns of “nature-related tipping points” involving sudden large changes that are difficult or impossible to reverse.

“There is a strong rationale for the ECB to supplement its prudential policy by accounting for nature-related financial risks in its monetary policy operations,” the report concludes, calling for mitigating actions “to be taken on a precautionary basis with qualitative as well as quantitative assessments of risk.