Central banks make landmark effort to mainstream nature risk

First authorities sounded the climate risk alarm. Now its nature’s turn, as demonstrated by today’s publication of Network for Greening the Financial System’s (NGFS) landmark conceptual framework for nature-related financial risks.

NGFS, an alliance of 114 central banks and financial regulators has set out a common language for nature risk and aimed at helpin central banks and financial supervisors navigate the complexities and challenges associated with managing nature risk.

It also revealed the interlinkages between climate and nature, calling for both to be treated together.

“Central bankers and supervisors can now work together from the same starting point,” said Klaas Knot (pictured), president of the Dutch Central Bank, and chair of the Financial Stability Board, at the launch event. “The degradation of nature creates significant financial risks and therefore falls directly within our mandate.”

Frank Elderson, member of the European Central Bank’s executive board, said reversing nature degradation wasn’t a “flower-power tree-hugging exercise” but core economics.

Similarly, the French central bank governor François Villeroy de Galhau said the nature crisis, along with the climate crisis, is the "existential crisis" of our times. “We cannot focus on one and hope the other will take care of itself,” he added.

De Galhau expected nature-related stress testing to be carried out "within a few years". Due for release in December, NGFS’s first nature-related scenario will examine the transition risk associated with removing harmful subsidies and protecting 30% of all land and sea by 2030, in line with the Kunming-Montreal Global Biodiversity Framework.

At the end of last year, governments from around the world reached a landmark agreement at COP 15 to adopt the Kunming-Montreal Global Biodiversity Framework.

The message from the NGFS central banking community was clear: nature risk is as serious as climate risk and needs immediate action. The framework's common language, which includes a definition of key concepts and a science-based understanding of nature risk, is designed to facilitate collective action and international coordination.

A matter of urgency

"Addressing nature-related risks and its broader implications for the financial sector is no longer just prudent – it is an imperative,” said Ravi Menon, chair of the NGFS and managing director of the Monetary Authority of Singapore.

Menon also expressed hope that finance could help “bend the curve of nature degradation”.

Emmanuelle Assouan, co-chair of the NGFS Taskforce on Biodiversity Loss and Nature-related Risks and director for financial stability and operations at Banque de France said, “There is no doubt that nature degradation is a macroeconomic threat that central banks and supervisors have to take into account in the exercise of their mandate.”

He added that the NGFS “is proud to have laid the foundations for such an approach” with its conceptual framework. He was confident that it will "prove to be a useful, operational handbook paving the way for numerous nature-related initiatives to come".

Asset owners take note

Asset owners have started to increase their focus on nature-related risks and look for the investment case. Scottish Widows’ Shipra Gupta recently told Net Zero Investor that investors should not only mitigate nature risk but actively invest in its restoration and conservation.

The final version of the Taskforce for nature-related financial disclosures (TNFD) is due for publication later this month and, alongside the NGFS framework, will help establish a solid nature risk foundation in the financial community.

Three main aims

The NGFS Conceptual Framework is the most recent milestone in the NGFS’ activities, following the launch of the NGFS Taskforce on Biodiversity-loss and Nature-related Risks in early 2022.

Under the umbrella of its overarching mission to mainstream nature risk, the conceptual framework has three main aims:

1. Define nature-related financial risks and related concepts that are needed for a high-level understanding of these risks.
2. Offer a framework to help central banks and supervisors identify and assess nature-related financial risks.
3. Outline the next steps to be taken by the NGFS Taskforce, including bridging the modelling and data gaps (notably on the development of nature-related scenarios), and using emerging datasets to support the alignment of policies on environmental sustainability and inform the assessment of nature-related financial risks.

Given its global ambition, the framework has taken a principles-based approach to facilitate uptake in multiple jurisdictions. 

"This document is merely a beginning," the framework read. "We will continue to develop knowledge and experience, but the lack of absolute certainty and perfect knowledge should not prevent us from acting now. Otherwise, we will almost certainly slide into a ‘too little, too late’ scenario."