A report by the Financial Stability Board (FSB), the G20’s financial watchdog, has found that financial regulators and supervisors in certain G20 countries are neglecting the potential risks associated with biodiversity loss and deforestation due to inadequate data. Instead, these regulators are primarily focusing on climate risks. The report states that assessing nature-related risks has revealed that biodiversity and nature loss could lead to credit losses, defaults, and sudden price corrections, posing financial risks to banks and other institutions. However, some regulators have yet to evaluate these risks. The report also highlights that financial institutions are exposed to physical risks through their investments and financing activities in sectors related to nature, such as food production. The FSB emphasizes the need for further work before estimates of financial exposures can be translated into risk measures.
Physical risks can occur when nature deteriorates, such as a decline in pollinating insects that are crucial for food production or the degradation of agricultural land. These risks are different from transition risks, which arise from actions and policies aimed at protecting or reducing negative impacts on nature.
According to the World Bank, a partial collapse of the ecosystem could result in a cost of 2.3% of global GDP by 2030, with the poorest countries being the most affected.
As the current G20 presidency holder, Brazil has assigned the Financial Stability Board (FSB) – a group consisting of central banks, treasury officials, and regulators from G20 countries – to conduct the first assessment of global regulatory and supervisory efforts in identifying and evaluating financial risks related to nature.
The Financial Stability Board (FSB) has discovered that financial authorities, including central banks and finance ministries, are at different stages of assessing the importance of biodiversity loss and other nature-related risks as financial risks. Some authorities have already implemented policies and guidelines, while others lack the necessary data and capacity to evaluate these risks adequately.
This study comes ahead of the United Nations’ COP16 biodiversity conference in Colombia in October, where world leaders are facing increasing pressure to prevent further destruction of critical ecosystems.
FSB Chair Klaas Knot stated in an email that this report contributes to international discussions on whether and how nature degradation, such as biodiversity loss, poses a significant financial risk.