- Report finds that financial authorities are at different stages of evaluating the relevance of financial risks from biodiversity loss and other nature-related risks.
- The major data and modelling challenges faced by analytical work to connect underlying nature risks with financial exposures and to translate estimates of financial exposures into measures of financial risk.
- Regulatory and supervisory work is at an early stage globally, with diverse approaches across jurisdictions, typically including the promotion of firm-level disclosures. A number of capacity-building initiatives are underway.
The Financial Stability Board (FSB) published a stock take of member financial authorities’ initiatives related to the identification and assessment of nature-related financial risks, which describessupervisory and regulatory initiatives as well as central banks’ and supervisors’ analytical work on whether and how nature degradation, including loss of biodiversity, is a financial risk.
The report highlights a number of observations:
Financial authorities are at different stages of evaluating the relevance of biodiversity loss and other nature-related risks as a financial risk, with approaches varying, in part due to differing mandates. Some authorities have already concluded there is a material financial risk, while others remain at the stage of monitoring international work on the issue. A few authorities have decided not to work on this topic, due to data gaps and the need to give sufficient priority to climate risks (where analytical thinking and data are further progressed).
Financial authorities which are analyzing the issue categorize nature-related risks into the same two types of risks typically used in climate-related financial risk analysis: physical and transition risks. However, analytical work faces major data and modelling challenges. Authorities’ work to date indicates that financial institutions face large exposures to physical risk via their investments and financing activities, but that analytical work needs to be further developed to better translate estimates of financial exposures into measures of risk. Authorities recognize the strong connections between climate risk and nature, and that more needs to be done to develop a more holistic approach that considers interdependencies between climate- and nature-related financial risks.
Regulatory and supervisory work is also at an early stage globally, and approaches differ considerably across jurisdictions and institutions. That said, a number of authorities from both emerging markets and advanced economies already have regulatory and supervisory initiatives underway.
For example, De Nederlandsche Bank (DNB) conducted a scenario analysis exercise in 2023 to explore the potential economic and financial stability impacts of a set of tail-event scenarios that reflect strong measures taken suddenly in response to nature degradation. According to DNB, the uncertainty associated with nature-related risks and the exploratory methodologies applied in the study made it challenging to provide a concrete estimate of the economic and financial stability impacts.
The study concluded that, although an initial assessment of financial risks for Dutch financial institutions points to limited impact (suggesting that it should be possible to take transition measures without causing a substantial impact on the Dutch economy and financial stability), the limitations identified likely point to an underestimation of the real economic and financial stability impact of the considered nature scenarios.
The report highlights other examples of approaches taken by international organizations and authorities. There is a general recognition that more expertise is needed in the supervisory community, in central banks, and in the private sector to understand and, where needed, address nature-related risks.