Professor Ulrich Volz contributes to new landmark report on biodiversity and financial stability
24 March 2022
A new report on ‘Central banking and supervision in the biosphere: An agenda for action on biodiversity loss, financial risk and system stability’ argues that biodiversity loss poses systemic risks in the same way as climate change. It calls for a concerted response by central banks and financial supervisors. The report was co-authored by a special study group set up by the Central Banks and Supervisors’ Network for Greening the Financial System (NGFS) and the International Network for Sustainable Financial Policy Insights, Research, and Exchange (INSPIRE), an independent research network and a designated stakeholder of the NGFS. The study group consisted of more than 100 central bankers, supervisors and researchers.
Professor Ulrich Volz , the Director of the SOAS Centre for Sustainable Finance and a member of the study group, said: “Biodiversity is declining faster than at any time in human history, threatening the very existence of our societies and economies, since these depend on intact ecosystems. The financial system, which sits at the heart of our economies, must account for nature risks and impacts. As guardians of the financial system, central banks and financial supervisors need to make sure that this happens. Importantly, this report shows that biodiversity loss threatens central banks and financial supervisors’ core mandates for financial and monetary stability. It is hence a clear call for action.”
The report makes five recommendations:
- Central banks and supervisors should recognise biodiversity loss as a potential source of economic and financial risk and commit to developing a response strategy. Financial authorities could include biodiversity loss within their green finance and environmental strategies, taking an integrated approach which highlights the links with climate change as well as the specific threats that it might pose to financial and price stability.
- Central banks and financial supervisors should build the skills and the capacity to analyse and address these risks. This should cover central bank and supervisory staff as well as market participants and other stakeholders. Emerging and developing economies have particular needs for capacity-building, and there is a rich agenda for further research to strengthen the evidence-base.
- Central banks and financial supervisors need to assess the degree to which financial systems are exposed to biodiversity loss. This could include conducting assessments of financial sector dependency and of impacts on biodiversity, as well as developing biodiversity-related scenario analysis and stress tests, and helping to create a dashboard of biodiversity metrics.
- Central banks and supervisors need to explore options for supervisory actions to manage biodiversity-related risks and minimise negative impacts on ecosystems. This could include the development of supervisory expectations of financial institutions such as banks, insurers and investors in relation to governance, risk management and strategy, disclosure and financial conduct.
- Central banks and financial supervisors can help to build the necessary financial architecture for mobilising investment that helps to conserve biodiversity. This could include contributing to the development of biodiversity taxonomies, exploring options for integrating biodiversity-related considerations into monetary policy, and incorporating biodiversity protection within central bank investment portfolios.
In addition, the report sets out a research agenda for central banks and academic researchers to continue to address some of the analytical and data gaps that the study group identified in the course of its work. Developing scenarios that describe the possible impacts of biodiversity loss, analogous to those developed for climate, is likely to be an area of particular focus.