A report by the Financial Stability Board (FSB), the financial supervisory body of the G20, reviews the activities of national regulators on integrating the risks associated with ecosystem degradation, deforestation and biodiversity loss
The most critical aspect is to identify effective indicators for the risk of loss of nature
The G20 is not doing enough about the financial risk associated with nature loss, i.e. phenomena such as ecosystem degradation, deforestation and loss of biodiversity. Few national regulators are systematically dealing with this, and even those who have made the most progress have to deal with many problems due to the difficult availability of data and the development of reliable forecasting models. This is underlined in a report by the Financial Stability Board (FSB), the financial supervisory body of the G20.
Loss of nature, how to assess its financial risk?
Globally, the inclusion of loss of nature as a financial risk has taken its first steps in recent years. The picture of the initiatives is, therefore, fragmented and inconsistent. Guidelines provided by financial supervisory bodies, where they exist, often address the risks associated with loss of nature on the climate risk counterpart, i.e. including them in the latter. Moreover, specific guidelines on natural risks are often less detailed than climate-related risks.
The approach used, for the most part, is similar to the one used for climate risks in other respects. The financial authorities analyzing the issue classify nature-related risks into the same two types of risks typically used in the analysis of climate-based financial risks: physical risks and transition risks. But with an important difference. It is much more complicated to find the data and, most importantly, to understand which ones are relevant.
“Economic activities rely on a multitude of ecosystem services, and ecosystems are highly complex and unpredictable, with multiple interactions among the various natural processes and organisms,” the report notes. “This multidimensionality implies that there is no single aggregate indicator for characterising the drivers or effects of nature loss, in the way that GHG emissions or temperature rise may be used as a summary statistic for climate change.”
The priority now is to translate financial exposure estimates into risk measures better. The report stresses that the authorities recognize the strong links between climate risk and nature and that more needs to be done to develop a more holistic approach that considers the interdependence between financial risks linked to climate and nature.
