Central Banking and Supervision in the Biosphere

Central Banking and Supervision in the Biosphere

24th March: NGFS-INSPIRE Study Group on Biodiversity and Financial Stability have published their final report ‘Central Banking and Supervision in the Biosphere: An agenda for action on biodiversity loss, financial risk and system stability’.

It finds biodiversity loss poses a significant and under-appreciated threat to financial stability, and central banks and financial supervisors should act to confront nature-related risks. The report argues that economic activity and financial assets depend upon the ecosystem services provided by biodiversity and the environment. This means that there are physical risks to finance if these services are undermined. But the transition to a global economy that protects nature also creates potential risks related to policy, technology, market and reputation. In addition, the financial system has an impact on biodiversity through the economic activities that are enabled by its lending, investment and insurance.

The report provides the first global assessment of why and how central banks and supervisors can respond to rising risks from biodiversity loss. It identifies 45 examples of authorities already taking action in countries such as Brazil, China, France, Malaysia, the Netherlands and the UK. It concludes that these initial first steps now need to be developed into a comprehensive response. To achieve this, the report makes five recommendations:

  • Central banks and supervisors should recognise biodiversity loss as a potential source of economic and financial risk and commit to developing a response strategy. Financial authorities could include biodiversity loss within their green finance and environmental strategies, taking an integrated approach which highlights the links with climate change as well as the specific threats that it might pose to financial and price stability.
  • Central banks and financial supervisors should build the skills and the capacity to analyse and address these risks. This should cover central bank and supervisory staff as well as market participants and other stakeholders. Emerging and developing economies have particular needs for capacity-building, and there is a rich agenda for further research to strengthen the evidence-base.
  • Central banks and financial supervisors need to assess the degree to which financial systems are exposed to biodiversity loss. This could include conducting assessments of financial sector dependency and of impacts on biodiversity, as well as developing biodiversity-related scenario analysis and stress tests, and helping to create a dashboard of biodiversity metrics.
  • Central banks and supervisors need to explore options for supervisory actions to manage biodiversity-related risks and minimise negative impacts on ecosystems. This could include the development of supervisory expectations of financial institutions such as banks, insurers and investors in relation to governance, risk management and strategy, disclosure and financial conduct.
  • Central banks and financial supervisors can help to build the necessary financial architecture for mobilising investment that helps to conserve biodiversity. This could include contributing to the development of biodiversity taxonomies, exploring options for integrating biodiversity-related considerations into monetary policy, and incorporating biodiversity protection within central bank investment portfolios.

In addition, the report sets out a research agenda for central banks and academic researchers to continue to address some of the analytical and data gaps that the study group identified in the course of its work. Developing scenarios that describe the possible impacts of biodiversity loss, analogous to those developed for climate, is likely to be an area of particular focus.

In response to the work of this Study Group the NGFS has issued a statement announcing it will establish a task force to mainstream the consideration of nature-related financial risks across its activities.

Read the NGFS statement here.

Read the NGFS’s press release here.

Read INSPIRE’s press release here.





Published March 24, 2022