Nature's decline threatens economy, demands global risk management
ECB Executive Board Member Frank Elderson emphasized the critical need for international cooperation to manage nature-related risks at the NGFS Annual Plenary Event. He highlighted the growing evidence of nature's decline impacting the economy and financial stability.
Economy's deep reliance on a strained nature
Nature forms the fundamental life-support system for economies, with the World Bank estimating that half of global GDP relies on biodiversity and ecosystem services.
In the euro area, nearly 75 percent of bank corporate lending supports firms highly dependent on at least one ecosystem service.
Despite this reliance, intensive land use, climate change, and pollution deplete resources 1.7 times faster than regeneration, creating a structural ecological deficit.
Degraded nature also hinders climate mitigation and adaptation; healthy ecosystems like swamps and forests absorb roughly half of human-induced carbon emissions, while wetlands protect infrastructure from flooding.
This critical depletion poses direct threats to economic stability.
Supervisors integrate nature risks into oversight
Nature degradation increasingly impacts business revenues and loan repayments, threatening bank balance sheets and financial stability.
Supervisors globally are integrating these risks into prudential oversight.
Brazil's central bank, for example, initiated a framework for collecting relevant information, and Hungary's central bank mapped biodiversity risks.
The Swiss Financial Market Supervisory Authority (FINMA) published a circular with implementation timelines.
The NGFS will soon release a guide with recommendations for supervisors.
The ECB has consistently expected banks to manage material nature-related risks since 2020, with 75 percent now using quantitative approaches, up from 40 percent in 2022.
From awareness to urgent preparedness
Banks increasingly recognize nature-related risks, but linking assessments to concrete risk management remains a challenge.
Quantifying diverse ecosystem services, unlike carbon emissions, complicates effective financial integration.
Therefore, sustained international cooperation and further research are crucial to translate awareness into robust preparedness, safeguarding financial stability.