COP15 marked a decisive moment for central banks and supervisors to address nature risks in the Anthropocene

Elena Almeida and Simon Dikau consider how the new Global Biodiversity Framework adopted at COP15 helps to crystallise financial sector action on biodiversity – and where work still needs to be done.

Globally, nature is declining at rates that are unprecedented in human history, with animal populations shrinking by almost 70% in the last 50 years, and a further one million animal and plant species at risk of extinction. Most of this decline is driven by human activity, resulting in the acknowledgement by many scientists that the Earth has entered a new geological epoch: the Anthropocene, in which changes to Earth’s climate and ecosystems are predominantly caused by human activity.

There is global recognition of the need to transform society’s relationship with nature. The 15th UN Biodiversity Conference of the Parties (COP15) to the Convention on Biological Diversity (CBD) in December 2022 brought together 188 governments from around the world to negotiate an agreement to halt nature loss. It resulted in the adoption of the Kunming-Montreal Global Biodiversity Framework, which comprises 23 targets to protect nature by 2030 and four long-term goals for 2050. It also places a strong emphasis on protecting the rights of Indigenous Peoples.

Business and finance representatives, as well as central banks and financial supervisors, have long been active at the climate-equivalent COPs, including COP27 in Egypt in November 2022, but up until COP15 they had been less prominent at the biodiversity COPs. Their noticeable engagement in Montreal was encouraging.

The relevance of the Global Biodiversity Framework targets for the financial sector

The Global Biodiversity Framework formalises material targets and therefore implicitly establishes the related risks. Of the 23 targets, six are particularly relevant for the financial sector:

• Protected areas (Target 2): Ensure at least 30% of areas of degraded terrestrial, inland water, and coastal and marine ecosystems are under effective restoration (up from 17% of terrestrial and 10% of marine currently protected).
• Climate–nature nexus (Target 8): Minimise the impact of climate change and ocean acidification on biodiversity and increase nature’s resilience, including through nature-based solutions or ecosystem-based approaches, while minimising negative impacts and capitalising on the positive impacts that climate action has for biodiversity.
• Policy alignment (Target 14): Ensure the full integration of biodiversity and its multiple values into national policies and regulations, including aligning fiscal and financial flows with the Global Biodiversity Framework.
• Impacts, dependencies and risk (Target 15): Undertake efforts to enable businesses and financial institutions to monitor, assess and report their dependencies and impacts on nature, with a goal to reduce negative impacts on biodiversity, increase positive impacts, reduce biodiversity-related risks to business and financial institutions, and promote actions to ensure sustainable patterns of production.
• Shift investment (Target 18): Reduce annual government subsidies for activities harmful to biodiversity by US$500 billion and scale up positive incentives for the conservation and sustainable use of biodiversity.
• Mobilise finance (Target 19): Deploy at least US$200 billion in public and private finance annually towards the implementation of national biodiversity strategies and action plans.

Targets 2, 14 and 18 (on protected areas, aligning policy and financial flows with biodiversity goals and shifting investment away from nature-harming activities) will likely create transition risks for firms, and consequently financial institutions. Central banks and supervisors will need to pay attention to this. Specifically, they will need to understand the implications of both investment in nature-based solutions or sustainable production and divestment from extractive or harmful industries, and consider how current policy frameworks under existing central bank mandates could be adjusted to take into account the need to scale down activities that harm biodiversity and scale up activities that enhance biodiversity.

Target 8 provides direction for the consideration of environmental risks: climate and biodiversity are interrelated and should be reflected as such in financial policymaking, where the current focus is (almost) solely on climate.

Target 15 suggests that ‘impacts and dependencies’ could be a dominant concept moving forward and encourages the development of frameworks to measure, report, understand and act in line with exposures to nature-related risks. Specifically, there is a need to understand the underlying drivers of biodiversity loss and environmental risks such as unsustainable consumption, environmentally harmful supply chains and overconsumption by wealthy countries, and how these can affect both planetary and financial stability.

Target 19 could catalyse the development of innovative financial instruments to scale up finance aimed at reversing biodiversity loss. It could also encourage central banks to consider whether their mandates provide an opportunity for them to play a role in enabling the scaling up finance into sectors of the economy that protect nature, or in scaling down finance into sectors of the economy that harm nature.

The role of central banks and financial supervisors

To achieve the targets of the Global Biodiversity Framework, and to translate them into assessment and policy frameworks to monitor, supervise and potentially redirect financial flows, central banks and financial supervisors can build on the momentum that has been building over the past three years. This includes the nature-related assessments already conducted by central banks and supervisors around the world and the work of the Joint Network for Greening the Financial System (NGFS) and INSPIRE Study Group on Biodiversity and Financial Stability, which resulted in acknowledgement by the NGFS network of 121 central banks and financial supervisors that nature-related risks are significant for the financial system and macroeconomy, and in the creation of a ‘Nature Task Force’.

The pioneering assessments of the financial sectors’ impact and dependency on nature developed by central banks in the Netherlands, France, Brazil, Malaysia and Mexico shed light on how, and to what extent, the financial system is exposed to nature-related risks. This encourages central banks and financial supervisors to also consider the potential financial stability implications of nature loss, and underscores the need for them to build biodiversity, nature and ecosystem loss considerations into prudential frameworks that may currently have a narrower climate focus. 

Knowledge and research gaps will have to be filled to enhance existing climate frameworks and to build new ones that incorporates the climate–nature nexus. Technical capacity will also be needed to translate the evidence base into integrated climate–nature assessment frameworks and policy frameworks. To support this, NGFS-INSPIRE contributed to a foundational framework for central banks and supervisors on how biodiversity loss could affect the financial system. It highlights the interacting and potentially compounding risks of climate change and nature loss, and outlines the prudential, monetary and communications tools available to central banks and financial supervisors to manage this emerging risk.  

Priority areas for central banks and financial supervisors

To break down the complexities of the nature and biodiversity loss crisis into parts that can be operationalised, central banks and supervisors could focus on specific drivers of nature loss and their impacts. Land-use change, specifically deforestation, is a major driver of both biodiversity loss and climate change. As a result, the integration of deforestation into climate risk assessment frameworks, including climate scenario analysis and monetary and prudential policy frameworks, is a tangible starting point.

It is important to note that the primary responsibility for halting nature and biodiversity loss and addressing the environmental crisis falls on governments. However, the financial sector will have an important role to play in enabling governments to achieve the Global Biodiversity Framework’s targets. Central banks and supervisors can catalyse the incorporation of nature protection within their remits and objectives, raise awareness on the urgency of nature’s decline, and work towards fully capturing the complex and compounding risks of climate change and nature loss in their assessment and policy frameworks.