Biodiversity loss and financial stability
Human activities are causing a decline in biodiversity through five main drivers of change: land and sea use change, unsustainable exploitation of organisms, climate change, pollution and invasive alien species.
Healthy ecosystems provide “ecosystem services” (material and water supply, climate regulation, pollination, etc.) on which economic activities depend. Their alteration could disrupt economic activities with potential consequences for financial stability. For this reason, central banks and supervisors (van Toor et al., 2020; NGFS and INSPIRE, 2021; Salin et al., 2021) are taking an increasing interest in the financial risks associated with biodiversity loss (physical risk) as well as those potentially generated by the incompatibility of business strategies and models with economic and regulatory changes aimed at protecting biodiversity (transition risk).
Biodiversity loss and financial stability
By: Mathilde Salin, Romain Svartzman, Etienne Espagne, Julien Gauthey, Paul Hadji-Lazaro, Thomas Allen, Joshua Berger, Julien Calas, Antoine Godin, Antoine Vallier – Banque de France
Biodiversity loss and the ECB
In this paper, Kedward et al. use the Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE) framework, which maps financial dependencies and impacts on ecosystems services, to analyze nature-related financial risks relating to the ECB’s CSPP/PEPP portfolio at the aggregate level. They find:
- 40% of the ECB’s corporate bond portfolio is potentially exposed to high or very high dependencies upon ecosystem services;
- 70% of the CSPP/PEPP portfolio is potentially contributing to key drivers of biodiversity loss;
- 25% of the ECB’s portfolio is potentially contributing to climate change and the emission of other biodiversity-negative pollutants.
Quantitative easing and nature loss: Exploring nature-related financial risks and impacts in the European Central Bank’s corporate bond portfolio
Authors: Katie Kedward, Josh Ryan-Collins, Adrienne Buller
From: UCL Institute for Innovation and Public Purpose, Common Wealth
