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Basic environmental and social risks remain unaccounted for in central banking and financial supervision

  • Date: 19 December 2023
  • Author: Maud Abdelli, Lead WWF Greening Financial Regulation Initiative

Our Planet needs nature to survive, and so does our financial system. Increasing biodiversity loss represents serious environmental and social risks to the stability of our price and market economy. With over half of the world's GDP heavily dependent on functional natural ecosystems, nature loss does not only directly affect companies and industries for example through supply chain disruptions, but also impacts communities who depend on fragile natural resources for their livelihood.

Findings from our recent annual assessment (SUSREG), which tracks progress on the integration of environmental and social risks in central banking and supervision activities in 47 countries, mostly members of the Network of central banks and supervisors for Greening the Financial System (NGFS), the Basel Committee (BIS) and International Association of Insurance Supervisors (IAIS), shows that since our first assessment in 2021, several central banks, financial supervisors and regulators are making notable progress.

We can see that some central banks and supervisors are starting to take into account nature-related financial risk disclosure in their activities, following sector specific guidance from the Taskforce for Nature-related Financial Disclosures (TNFD) in the field of agriculture, aquaculture, forestry, mining, oil and gas, utilities, chemicals and pharmaceuticals sectors. Banque de France for instance has started to measure and disclose the impact of its own portfolios and pension fund on biodiversity, such as the total biodiversity impact, biodiversity footprint, and weighted average biodiversity intensity of their equity portfolio.

A number of financial supervisors in emerging countries are also showing exemplary progress in greening their financial supervision policies, including Malaysia, Brazil and Thailand. The Bank of Thailand for example, is now developing a sustainable taxonomy that provides a traffic light system defining what are considered “green, amber, and red” activities including its criteria and thresholds.

However applaudable this progress, the majority of large economies are not taking sufficient action to transition to a financial system that is net zero, protects nature, and does not leave vulnerable communities behind.

Most countries focus primarily on climate risk with some positive developments on the financial supervision front, like growing requirements for financial institutions and corporations to disclose their climate transition plans. On the down side, broader environmental and social risks are largely falling behind. Even countries that have the necessary resources to finance the transition show insufficient progress. Indeed, 68% of high-income countries have yet to adopt strong enough climate and environmental banking supervision policies. Some of the highest emitting countries have not put in place sufficient climate-related banking and insurance supervision policies, despite their significant contribution to the rise in global temperatures.

Sustainable banking and insurance supervision policies are also falling short in the most biodiverse countries of the Asia-Pacific and Latin America, leaving them highly exposed to nature-related risks. Species as well as ecosystem diversity are essential to maintaining valuable ecosystem services on which our economy and society depend so strongly on. This underscores the importance of central banks and financial supervisors in protecting the financial sector and wider economy from these risks.

As for greening central banking monetary policies, apart from the European Central Bank which is leading the way, very few central banks integrate environmental let alone social aspects into their monetary toolkits.

Change is possible. But central banks, supervisors and regulators need to play a more important role in steering the financial sector toward sustainability by prioritising the most impactful measures that deliver the biggest results.

Protecting nature is integral to effective climate action. Minimum E&S policies in central banking and financial supervision are a “must” to put the entire financial sector on the right track.

At the recent COP28 UN climate summit, countries agreed to transition away from fossil fuels, but failed to commit to their phase-out and to prioritizing the protection of nature. The challenge of raising ambition on combined climate-nature action, including delivering on the landmark Kunming-Montreal Global Biodiversity Framework agreed a year ago, now falls in part on financial institutions. Directing finance away from the most harmful activities like coal, gas and oil, among others, will be crucial in the transition to a low carbon economy. Phasing out the most harmful sectors from central bank portfolios and imposing higher capital requirements on financial institutions’ lending, investing and insuring companies with always environmentally-harmful activities are bold measures that will make real impact. Instead of waiting for the perfect data and models, preventive and impactful measures are the only way forward in the face of uncertain and growing catastrophic environmental events.

We don't have much time left. Governments, central banks, financial supervisors and regulators must take bolder action and create a conducive environment for a green, fair and just transition to happen where no one is left behind.


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