FSB takes stock of the wide range of regulatory and supervisory initiatives on nature-related financial risks

The Financial Stability Board (FSB) has released a comprehensive stocktake of member financial authorities’ initiatives concerning the identification and assessment of nature-related financial risks. This report, which will be delivered to the meeting of G20 Finance Ministers and Central Bank Governors in Rio de Janeiro on 25-26 July 2024, describes supervisory and regulatory initiatives alongside analytical work conducted by central banks and supervisors. The work explores whether and how nature degradation, including the loss of biodiversity, constitutes a material financial risk. The report finds that while progress is being made, global efforts are still in their early stages.

Evaluation of nature-related financial risks

The report highlights that financial authorities are currently at varying stages of evaluating the relevance of biodiversity loss and other nature-related risks. Approaches differ across jurisdictions, often influenced by the specific mandates of the respective authorities. Some authorities have already concluded that nature-related issues represent a material financial risk. Others remain at a preliminary stage, primarily monitoring international developments on the topic. A few authorities have decided not to engage with this issue yet, citing significant data gaps and the necessity of prioritising climate risks, where analytical frameworks and data are more mature.

Data and modelling challenges in analytical work

Financial authorities currently analysing nature-related risks generally categorise them into two types, mirroring climate-related financial risk analysis: physical risks and transition risks. However, the report notes that analytical work faces major data and modelling challenges. There is a significant hurdle in connecting underlying nature risks with specific financial exposures and subsequently translating those exposures into reliable measures of financial risk. Evidence to date indicates that financial institutions face large exposures to physical risk through their financing and investment activities. However, analytical tools must be further developed to better translate these estimates into actionable risk assessments.

Global regulatory and supervisory landscape

Regulatory and supervisory work regarding nature-related financial risks is currently at an early stage globally. Approaches vary considerably across different jurisdictions and institutions, though they typically include the promotion of firm-level disclosures. Despite the nascent stage of this work, several authorities from both emerging markets and advanced economies have already launched regulatory and supervisory initiatives. There is a general recognition within the international community that more expertise is required across central banks, the supervisory community, and the private sector to effectively understand and address nature-related risks. Consequently, a number of capacity-building initiatives are underway worldwide.

Interdependencies between climate and nature

Authorities recognise the strong connections between climate risk and nature. The report emphasizes the need to develop a more holistic approach that considers the interdependencies between climate-related and nature-related financial risks. Developing this integrated perspective is seen as essential for a comprehensive understanding of financial stability in the context of environmental degradation.

Notes to editors

The stocktake is based on a survey of participating FSB members and draws on work performed by international organisations. This includes the conceptual framework developed by the Network for Greening the Financial System (NGFS) and research by the Organisation for Economic Co-operation and Development (OECD), which was funded by the European Union. The FSB itself coordinates the work of national financial authorities and international standard-setting bodies at the international level. It aims to develop and promote effective regulatory, supervisory, and other financial sector policies in the interest of maintaining financial stability. The FSB brings together national authorities from 24 countries and jurisdictions, international financial institutions, and committees of central bank experts, while also conducting outreach to approximately 70 other jurisdictions through its six Regional Consultative Groups. The organisation is currently chaired by Klaas Knot, President of De Nederlandsche Bank, and the FSB Secretariat is hosted by the Bank for International Settlements in Basel, Switzerland.