- The degradation of nature, including biodiversity loss, is a substantial threat to humanity, the economy and financial stability. This is why financial stakeholders can benefit from frameworks that model scenarios and risks which provide a comprehensive understanding of integrated climate- and nature-related economic and financial risks.
- Central banks and financial supervisors have an important role in leveraging these insights and evidence to manage financial risks and ultimately prevent future irreversible environmental degradation.
- This project highlights the urgent need to address the interconnected threats of climate change and ecosystem collapse and encourages further research to refine risk modelling frameworks.
- The research is based on integrating climate and nature policies into a scenario modelling framework, to model biophysical and economic risks for the agricultural and land use sector, globally from 2020 to 2050.
- The project explores a business-as-usual scenario, which lacks both effective climate and nature protection measures, and finds it can lead to significant biodiversity loss and degradation of ecosystem services.
- The project explores a climate-only policy scenario and finds it does not safeguard biodiversity and presents significant economic risks to the agricultural sector.
- The project explores an integrated climate-nature policy scenario and finds it safeguards biodiversity and limits global temperature increase while maintaining agro-economic stability.
20 November 2024 – New analysis from NatureFinance, the Potsdam Institute for Climate Impact Research (PIK), the European Central Bank (ECB) and the University of Minnesota, on the heels of the UN Biodiversity COP in Colombia and the last week of the UN Climate COP in Azerbaijan, shows that a failure to integrate climate and nature policies will create heightened risks to economies, the climate and ecosystems.
The assessment provides insight for central banks, financial regulators, and risk management experts on the critical importance of understanding the connections between climate and nature policies when assessing future economic and financial risks. The study emphasises the importance of biodiversity, soil health, and pollination in supporting global economies. It introduces economic risk indicators to show how policy ambitions affect macroeconomic factors like food prices.
By understanding these interdependencies, central banks, financial regulators and policymakers can identify critical areas for action that addresses both physical and transition risks. This approach is essential to developing robust financial policies that uphold financial stability in the face of nature-related risks.
The research shows how an integrated approach to climate-nature scenarios provides a more nuanced and comprehensive understanding of biophysical and economic risks compared to a siloed analysis. In other words, modelling climate risk or nature risks independently of the other presents a less accurate picture of the future.
Julie McCarthy, CEO of NatureFinance, said: “Currently, central banks see their mandate as being solely about financial stability, but financial stability is not possible without a stable climate and healthy natural ecosystems. Continuing to treat nature and climate separately in risk assessments and transition planning will undermine financial stability and lead to misguided transition strategies. Central banks and governments need to step up and mandate that integration from the top down. The climate crisis and biodiversity collapse are deeply interrelated challenges that demand an integrated approach from financial supervisors, policymakers and financial institutions to protect society from the worst potential impacts of both.”
This project represents one of the first attempts to integrate nature and climate risks into one holistic set of scenarios. According to NatureFinance, as custodians of economic and financial stability, governments, central banks and financial regulators need to urgently work together to mandate financial institutions to account for climate and nature-related risks in an integrated manner.
Irene Heemskerk, Head of Climate Change Centre, European Central Bank said: “We need to look ahead and address the complex threats posed by climate change and nature degradation. Adopting an integrated and forward-looking approach to our risk assessments and developing dedicated tools to quantify physical and transition risks is much needed. The joint scientific report provides us with a useful ground to build on.”
Alexander Popp, leader of the Land-Use Management Working Group at PIK, and Professor for Sustainable Land Use and Climate Mitigation at the University of Kassel said : “While modelling and related scenarios from this project help us to better capture and understand the scope of increased risks presented by integrating climate and nature, we are likely still underestimating those risks overall. The complexity of linking human impacts on biodiversity to economic well-being often results in models lacking full integration of land-use impacts and macroeconomic connections. Future efforts should aim to combine macroeconomic and biophysical land models to enable more comprehensive assessments and science-based recommendations.”
NatureFinance and the ECB will co-host an online event, November 28th at 14.00 – 16.00 CET to present the project’s conclusions and bring together leading experts to discuss recent developments in assessing nature-related risks and integrating them into climate-nature scenarios.
About NatureFinance
NatureFinance is a Geneva-based, international not-for-profit organisation dedicated to aligning global finance with equitable, nature positive outcomes and thereby accelerating climate goals and a just transition to sustainable development. Its work spans initiatives that are building and using biodiversity data to better manage nature related risks, developing purposeful nature markets, advancing financial innovations including in sovereign debt markets, strengthening nature related liabilities and citizen action on nature. Find out more via our website: www.naturefinance.net
Media Contacts
Anastasia Biselli: anastasia.biselli@naturefinance.net
Joanna Benn: jo.benn@naturefinance.net
