Biodiversity-related risks to the financial sector

Biodiversity and ecosystem services underpin all economic activities and human well-being, yet biodiversity is being destroyed at an unprecedented rate, posing significant risks to the economy and financial sector. Biodiversity-related financial risks, dependencies and impacts remain systematically mispriced by the financial sector, leading to its exposure to financial-related risks. Central banks and supervisors need to better understand, assess and manage biodiversity-related financial risks, with respect to central bank operations, collateral frameworks, financial stability and banking supervision.

Recognising this need, the European Commission is supporting the Hungarian central bank (MNB), at MNB’s initiative, and has just launched, together with the OECD, a project on  “Developing a Supervisory Framework for Financial Risks Stemming from Biodiversity-related Losses”. This project is financed by the European Union through the Technical Support Instrument (TSI) and implemented by the OECD, in cooperation with the European Commission's Directorate-General for Structural Reform Support (DG REFORM).

The organisational set-up of this 22-month project ensures coordination and cooperation between the DG REFORM, the MNB and the OECD. On the OECD side, the project  is being jointly undertaken by the OECD Committee on Financial Markets (CMF) and the Working Party on Biodiversity, Water and Ecosystems (WPBWE) and Working Party on Climate, Investment and Development (WPCID) of the Environment Policy Committee (EPOC).

The Project will develop a supervisory framework to help the Hungarian central bank (MNB) and other central banks assess biodiversity-related financial risks in the financial system, including transmission channels for physical and transition risks. The Project will aim to help MNB and banks with retail activities in Hungary become more informed about their exposures, impacts and dependencies to biodiversity-related financial risks, to improve management of such risks.

The Project will be undertaken two phases:

• Phase 1 (11 months) will result in a methodological framework designed to translate biodiversity risks to financial risks, drawing on a mapping of existing tools, practices, definitions, transmission channels, metrics and indicators. This conceptual framework will be relevant across country contexts for central banks, supervisors and retail banks. The Project will also involve engaging with key stakeholders to assess data needs and gaps.
  
  
• Phase 2 (11 months) of the Project will involve collection of available data, providing options for bridging data gaps, development of a software-based tool to implement the methodological framework to analyse the biodiversity-related financial risks, impacts and dependencies of the Hungarian financial system, and report on applicability. The Project will also involve communicating key findings to banks, MNB, EU and in particular Central and Eastern European supervisors and broader OECD policy communities. This is expected to help MNB introduce policies to improve financial resilience and stability of the Hungarian financial system, assess limit banks’ unmanaged risk taking and support sustainable economic development by counteracting biodiversity loss.