No disclaimers: the need to manage biodiversity risks in the financial sector
Pre-recorded contribution by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the Finance and Biodiversity Day COP15 Parallel Event organised by the Convention on Biological Diversity Secretariat
Frankfurt am Main, 14 December 2022
This week the Governing Council of the European Central Bank, of which I am a member, is meeting to discuss monetary policy. I recorded this message just before the start of the week-long “quiet period” which occurs before each monetary policy meeting. What I say in this message should not be taken as having any bearing on our ongoing monetary policy deliberations.
This disclaimer does not mean that my words today are any less relevant or important. Nor does it stop me from taking the opportunity to praise the Convention on Biological Diversity Secretariat for holding a dedicated event on finance for the first time in the history of the United Nations Biodiversity Conference (COP). Similarly, it does not prevent me from making the connection between this particular milestone and the consensus adopted earlier this year by global central banks and supervisors that “nature-related risks, including those associated with biodiversity loss, could have significant macroeconomic implications, and that failure to account for, mitigate, and adapt to these implications is a source of risks for individual financial institutions as well as for financial stability”. This is what the Central Banks and Supervisors Network for Greening the Financial System – now counting 121 members worldwide – communicated in a statement published last March.
To account for the implications of the ongoing biodiversity crisis is exactly what we at the European Central Bank set out to do. Back in 2020 we issued a supervisory guide outlining how we expect the banks under our supervision to manage climate-related and environmental risks, making explicit reference to the risks caused by biodiversity loss. Since issuing this guide, we have made clear to the banks that we will keep a close eye through all our supervisory interactions on how they are progressing from a compliance perspective.
At the outset, very few banks had begun to implement practices to deal with environmental risks in line with the expectations set out in our guide. But we now see that many of them have conducted an initial assessment of their environmental risk exposures. We also see that they are using their “climate risk playbook” to develop their approach to environmental risk, acknowledging that these are two ongoing crises with interdependencies. They map out physical and transition risk drivers and typically start by excluding certain activities to avoid financing those that have an excessive environmental impact. Banks also integrate these risks into their due diligence processes to collect information and gain a better understanding of how their clients might be affected. Besides these qualitative approaches, several institutions are leading the way in quantifying risks and impacts through the use of biodiversity footprinting exercises and by developing approaches for biodiversity scores. We welcome this progress and have taken the opportunity to share any good practices we have identified.
At the same time, in keeping with the spirit of COP15, we should not just celebrate the distance we have covered. Instead, we should be mindful of the fact that there is still a long way to go before financial institutions fully account for, mitigate and adapt to all the material risks caused by biodiversity loss in line with the objective set following the global consensus on the materiality of these risks. This requires further work from financial institutions themselves, but also from regulators, the international standard setting bodies and all supervisors around the world. In the ECB’s case, we have reiterated that all banks under our supervision must ultimately comply with all of our expectations on all material climate-related and environmental risks by the end of 2024 at the latest.
Financial institutions need to manage biodiversity risks just like any other material risk they face. And as supervisors, we will make sure that they do. To this there cannot and will not be any disclaimers.
NGFS (2022), “Statement on Nature-Related Financial Risks”, March.
ECB Banking Supervision (2020), “Guide on climate-related and environmental risks – supervisory expectations relating to risk management and disclosure”, November.
ECB Banking Supervision (2022), “Good practices for climate-related and environmental risk management – observations from the 2022 thematic review”, November.