Biodiversity is the most complex and vital feature of the planet; however, recent research has found that biodiversity is declining faster than at any time in human history.
A new vision paper discussing the links between biodiversity loss and our macroeconomic and financial systems has taken a positive step towards providing a comprehensive assessment of the problems this poses, and the potential solutions for the financial sector.
Biodiversity comprises several levels, from genes at one end of the scale to entire ecosystems at the other.
Its loss has a huge impact, potentially influencing human migration patterns and generating geopolitical instability and conflict, according to the vision paper, published by a joint study group formed by the Network for Greening the Financial System (NGFS) and the International Network for Sustainable Financial Policy Insights, Research, and Exchange (INSPIRE).
Policy efforts have been unable to slow the loss of biodiversity and the pressures driving the decline continue to intensify. However, the appetite for change appears to be growing, with 75 financial institutions (managing over £12 trillion in assets) now signed up to the Finance for Biodiversity Pledge, committing to set targets and disclose their annual progress on increasing positive (and decreasing negative) impacts on biodiversity.
Biodiversity and the macroeconomy
The global economy and financial system are entirely dependent on the biosphere, with all companies ultimately reliant upon clean air, fresh water and fertile soils. But companies also affect the ecological systems that provide these “services”, estimated to be worth around double the world’s GDP.
The vision paper summarises the findings from several studies that have aimed to quantify our economic
dependence on the environment. One estimates around 55% of global GDP depends on “high functioning biodiversity and ecosystem services”, while another places the value of ecosystem services as high as US$140 trillion per year.
It also sets out the study group’s objective of assessing how biodiversity loss, and the need to reverse it, could affect the macroeconomy, and how the macroeconomic impacts will, in turn, affect financial stability.
Biodiversity loss may pose financial risks to individual institutions and to the entire financial system. A microprudential analysis (analysis of individual financial institutions) is therefore likely to be important. De Nederlandsche Bank is the first bank to examine the impacts and dependencies of its financial system on biodiversity. It found that over a third (36%) of investments by Dutch financial institutions are either highly or very highly dependent on one or more ecosystem “service”.
This loss can affect a range of financial institutions and systems through a variety of channels. Physical risks include changing land use, climate change and pollution. Transitional risks could include government measures, technological developments, litigation, and changing consumer preferences.
What next?
The vision paper identifies the need for a comprehensive approach to risk management to better understand how financial institutions are exposed and to evaluate the risks for particular
countries.
It also intends to explore the role of central banks and supervisors across a range of functions, which will include assessment and monitoring; microprudential; macroprudential; monetary; portfolios; policy; and scaling up.
Biodiversity loss is a serious threat to the globe and to the financial sector, and a more comprehensive understanding by policymakers and regulators is vital to limit further damage and reverse existing loss.
The role of central banks and financial supervisors, and the part they might play in safeguarding biodiversity by adopting a “strategic and structured approach”, is at the centre of the initial agenda.
For more information, contact Patrick Bell, a Partner in Shepherd and Wedderburn’s banking and finance team and member of the firm’s Clean Energy Group, at patrick.bell@ shepwedd.com.
