Calls to respond to the effects of climate change carry the urgent message that we all need to act now to protect our planet, restore nature and work towards securing a sustainable future. Among the dangers of climate change are threats to biodiversity, which has continued to decline in recent years. While many point to the world’s governments to lead the way, other groups, such as financial institutions, are searching for ways to contribute.
The Network for Greening the Financial System (NGFS) is a group of 108 central banks and financial supervisors that spans five continents. Since 2017, the NGFS has worked to develop ways to manage environmental and climate risks in the financial sector, all the while mobilizing finance to support the transition to a sustainable economy. Additionally, through a partnership with the research network INSPIRE (International Network for Sustainable Financial Policy Insights, Research and Exchange), the NGFS has recently worked to develop a research-based approach to assess biodiversity loss.
This partnership has produced several papers since April 2021, cumulating in a final report earlier this year. The Moore Foundation’s Conservation and Markets Initiative, which works to address threats to ecosystems from food commodities, supported INSPIRE’s research through the Finance Hub. The Finance Hub utilizes grantmaking to improve financial institutions’ understanding of risks and opportunities in areas such as deforestation and overfishing – putting illegal practices in the agriculture and seafood industries under the microscope.
The NGFS report concluded that as biodiversity loss poses a significant, yet underrated threat to global economic, financial and social systems, central banks should dedicate resources towards addressing it, prioritizing action even in the face of incomplete data. While the true extent of the problems remains uncertain, significant research has indicated that mitigation is needed through further changes in financial system, addressing areas like habitat degradation.
The report noted two primary threats stemming from biodiversity loss: economic activity and financial assets are dependent on ecosystem services provided by biodiversity (physical risks) and said economic activity in turn has an impact on biodiversity, potentially raising issues during the transition to a sustainable global economy (transition risks). While the NGFS has focused on climate change, climate change is also a major driver of biodiversity loss and activities such as deforestation are contributing to both problems.
Following the release of these reports, the NGFS issued a powerful statement that highlighted nine key points, acknowledging that the risks stemming from biodiversity loss have significant financial implications, and that institutions should account for, mitigate and adapt to those implications. Financial institutions will need to build an analytical framework to study these issues and use this research to develop policies that support sustainability and address nature-related financial risks. Building on the joint study group’s work, The NGFS has created a task force to further delve into relevant nature-related considerations, moving to address analytical and data gaps the study group identified.
This is an important milestone in understanding the links between nature and food production, and the need to shift to practices that decouple environmental degradation from food. As it stands, financial systems and institutions enable potentially destructive economic activities through avenues such as lending and insurance. For example, when financial institutions provide capital to companies involved in beef or soy production, they risk supporting practices that contribute to deforestation and further biodiversity loss. With the study group’s final report emphasizing the importance of developing response strategies and pointing to positive steps being taken in countries across the world, financial institutions can explore ways to develop and share emerging data and best practices that will align policies with sustainability goals.
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