A leading central banker has described developing scenarios for nature loss as “one of the most complex tasks I have ever seen”.
The intricate nature of devising meaningful scenarios for nature loss will hinder efforts to stress-test banks on nature, in the same way as banks have been stress tested for climate change, said Jean Boissinot, deputy director for financial stability at the Banque de France.
As a result, he suggested that an easier approach may be to “challenge” banks to explain their approach to managing these risks, rather than trying to devise a stress test.
Boissinot is also head of secretariat at the Network for Greening the Financial System (NGFS), an initiative involving many of the world's biggest central banks and supervisors, which has issued a report on how to devise nature scenarios.
He told an Environmental Finance webinar on regulation: “You cannot do a stress test without a good scenario. Thinking about developing scenarios, this is honestly one of the most complex tasks I have ever seen.
“We are lacking good examples of applications of dependencies on nature, and also are lacking a good understanding of how this can reverberate across the economy to the point it is causing financial stress. We are working hard on that.
“Microprudential supervision may be [an] easier [way] to start developing a policy agenda. People are starting to challenge banks about how they understand these risks.”
He added all economic activities depend on nature to some extent, but nature remains an “under-researched” area.
“Now people have realised climate is not a crisis in isolation, it needs to be framed in this wider nature perspective.”
But, whereas climate literacy had grown in the financial sector since the Paris Climate Agreement eight years ago, “nature literacy is as critical but more difficult”.
Boissonot added: “What are the consequences of us losing some ecosystem services? Until you have a good understanding of this it’s very difficult to act upon it or know.
“With climate, you start with people you expect to change the most for a net zero economy. When you want to understand who is impacting nature, that might be a bit more difficult.”
A recording of the webinar, which was sponsored by WWF and hosted speakers from the Banque de France, Monetary Authority of Singapore and the Taskforce on Nature-related Financial Disclosures, is available to view here.
Also see:
NGFS encourages central banks to tackle nature-related risks
