..focus on the legal implications of nature-related risk for our central banking and supervisory work. I will outline the growing trend of nature-related litigation. Then I will look at how nature-related risk should be considered in the context of the mandates of central banks and supervisors.
As a lawyer, I am always glad to discuss the novel legal issues affecting the work of central banks and supervisors.
At last year’s conference I spoke to you about climate-related litigation and its impact on the financial sector. This year I want to talk about the risks that nature degradation poses to the economy and the financial sector.
As I have said before, assessing nature-related risk is not some kind of tree-hugging exercise. We are talking about material financial risks, which – like any other type of risk – must be assessed, analysed and managed.
Today, I want to focus on the legal implications of nature-related risk for our central banking and supervisory work. I will first outline the growing trend of nature-related litigation. Then I will look at how nature-related risk should be considered in the context of the mandates of central banks and supervisors.
Nature degradation: risks for the economy and the financial sector
Scientists worldwide agree that nature has been declining at an unprecedented rate over the past 50 years. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) already sounded the alarm back in 2019, shortly before the outbreak of the global pandemic. The IPBES report even warned us that nature degradation was exacerbating emerging infectious diseases in wildlife, domestic animals, plants and people.
The decline of nature is primarily caused by human activity and is being made worse by climate change. Scientists have calculated that humanity is using natural resources 1.7 times faster than ecosystems can regenerate them – in other words, we are consuming resources equivalent to 1.7 planet Earths.
This decline undermines the planet’s ability to provide ecosystem services, which are the benefits we obtain from nature to support and sustain our society and economies. Examples of ecosystem services include food, drinking water, timber and minerals; protection against natural hazards, such as floods and landslides; or carbon uptake and storage by vegetation.
The degradation of nature not only threatens these ecosystem services, but also increases the risk of us reaching ecosystem tipping points, i.e. non-linear, self-amplifying and irreversible changes in ecosystem states that can occur rapidly and on a large scale. Through these tipping points, we are at risk of going beyond the Earth’s safe operating space for sustaining life on the planet.
From the perspective of central banks and supervisors, the degradation of nature makes our economies, our companies and our financial institutions increasingly vulnerable.
We cannot ignore these vulnerabilities. Indeed, we need to deepen our understanding of how nature-related financial risk affects the economy and the financial system.
Work is progressing at the ECB: for example, our research has found that 72% of euro area companies are highly dependent on ecosystem services and would experience critical economic problems as a result of ecosystem degradation. Moreover, research by the European Commission has detailed that several sectors of the European economy – in particular agriculture, real estate and construction, and healthcare – are heavily dependent on nature and thus exposed to associated risks.
Work is also progressing at international level. The Financial Stability Board recently took stock of supervisory and regulatory initiatives among its members and established that a growing number of financial authorities are considering the potential implications of nature-related risks for the financial sector. In addition, the Network for Greening the Financial System (NGFS) – a network of 138 central banks and supervisors from around the world – had already acknowledged the relevance of nature-related risks for the mandates of central banks and supervisors back in March 2022. The NGFS has since developed a conceptual framework offering central banks and supervisors a common understanding of nature-related financial risks and a principle-based risk assessment approach.
All these efforts are improving our ability to quantify the financial implications of nature degradation. And of course, there are also important legal implications that we need to start talking about....
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