Macrofinancial causes and risks of deforestation, land conversion and water stress: the role of central banks and financial supervisors

Principal Investigator

• Maria Nikolaidi (University of Greenwich)

Co-Principal Investigator

• Yannis Dafermos (SOAS University of London)

Co-investigators

• Chiara Colesanti Senni (University of Zurich)
• Adrian von Jagow (Vienna University of Economics and Business)

Funder

• WWF Switzerland

Duration

• 2023-2025

Human activity across the globe has led to an unprecedented depletion of natural resources and degradation of ecosystems. Recent academic literature and policy analyses have focused on the climate aspects of this environmental depletion and degradation and their implications for the macrofinancial system and the design of monetary and financial policies. However, the interactions between the macrofinancial system and the non-climate aspects of the environmental crisis are under-explored and not well-understood. 

This project fills in this gap by developing a conceptual framework and a scenario analysis of (i) the transmission channels through which deforestation, land conversion and water stress interact with the macroeconomy and the financial system and (ii) the role that financial and monetary policies can play in helping address the environmental crisis.

Conceptually, the project relies on a double materiality lens which highlights that the macrofinancial system is not only affected by environmental change (financial materiality), but it also contributes to the emergence of environmental problems, such as land conversion and water stress (environmental materiality). Double materiality is  analysed using a stock-flow consistent approach which is well-suited to capturing the dynamic interactions between monetary stocks and flows (such as debt, credit flows and consumption spending) and physical stocks and flows (such as available water stocks, deforestation flows and cropland areas). 

The project extends the DEFINE ecological stock-flow consistent modelling framework to incorporate land conversion and water. This extended modelling framework is then used to conduct a scenario analysis that explores the macrofinancial implications of land conversion and water stress at the global level. Scenario analysis is also used to identify how central banks and financial supervisors can design policies that, in combination with fiscal and regulatory policies, can help address ecological sustainability challenges.

Header image credit: Geranimo via Unsplash. 

• Dafermos, Y., Nikolaidi, M., Colesanti Senni, C. and von Jagow, A. (2024). Macrofinancial causes and risks of deforestation, land conversion and water stress: analysing the role of central banks and financial supervisors through a stock-flow double materiality lens, SOAS University of London; University of Greenwich; University of Zurich; Vienna University of Economics and Business.