Financial regulators and supervisors in some G20 countries are overlooking the risks posed by biodiversity loss and deforestation because of insufficient data, focusing instead on climate risks, a report by the G20’s financial watchdog found.
Regulators who have assessed nature-related risks found that biodiversity and nature loss could result in credit losses, defaults and abrupt price corrections that pose financial risks to banks and other institutions, said the report released on Thursday by the Financial Stability Board (FSB).
But some are yet to even assess these risks, it said.
Financial institutions face exposure to physical risk via their investments and financing activities in sectors related to nature such as food production. The FSB said more work is needed before they can translate estimates of financial exposures into measures of risk.
Physical risks can arise from the degradation of nature such as a decline in pollinating insects essential for food production or the degradation of agricultural land. That differs from transition risks, which arise from actions and polices aimed at protecting, or reducing negative impacts, on nature.
The World Bank has estimated that a partial collapse of the ecosystem could cost 2.3% of global GDP in 2030, with some of the poorest countries worst hit.
Brazil, which holds the current G20 presidency, tasked the FSB – a grouping of central banks, treasury officials and regulators from G20 countries – to carry out the first stocktake of global regulatory and supervisory efforts to identify and assess nature-related financial risks.
The FSB found financial authorities including central banks and finance ministries are at varying stages of evaluating the relevance of biodiversity loss and other nature-related risks as a financial risk. Some were already introducing policies and guidance while others lacked the required data and sufficient capacity to examine such risks.
The study comes ahead of the United Nation’s COP16 biodiversity conference in Colombia in October where world leaders are under growing pressure to prevent further destruction of key ecosystems.
“This report contributes to international discussions on whether, and if so how, nature degradation, such as biodiversity loss, is a relevant financial risk,” said FSB Chair Klaas Knot in an emailed statement.
—Virginia Furness, Reuters