UNEP finance experts on integrating nature loss risk into finance, regulation and policy
The links between nature loss and risks to people, the financial system and the environment are growing ever clearer. As essential ecosystems such as the Amazon rainforest and global coral reefs are in danger of collapse and increasing numbers of species are disappearing forever, the living framework on which our economy — and our civilization — depends is weakening.
Prudential supervisors, central banks, and policymakers are increasingly acknowledging and considering how to address these nature-related risks to financial stability within their mandates.
The links between nature loss and risks to people, the financial system and the environment are growing ever clearer.
Some countries and regions have already begun leveraging lessons learned from integrating climate risk into nature-related regulations. However, until recently, the full picture of where and how these regulations are unfolding was unclear.
The United Nations Environment Finance Initiative (UNEP FI) has collaborated with WWF’s Greening Financial Regulation Initiative to assess the landscape of nature-related regulations for banks globally. This has been done for the benefit of financial sector stakeholders and policymakers looking to make sense of this rapidly evolving area and respond to the pressing dual challenges of climate change and nature loss.
Our new report, Navigating Nature-related Risks for Banks, examines 50 jurisdictions spanning all major regions. We found that central banks and supervisors in at least 29 of these jurisdictions — with assets worth more than US$77 trillion — are already considering nature-related risks within their prudential frameworks.
We found that central banks and supervisors… with assets worth more than US$77 trillion are already considering nature-related risks within their prudential frameworks.
Beyond prudential regulation, the report also considers the enabling environment of taxonomies, corporate disclosures, and due diligence obligations, which depend on and inform each other from local to global scales and create a complex, interconnected system of rules and frameworks. Integration of nature-related risks on the rise.
Our analysis shows that these efforts are at different stages of maturity across countries and regions, with numerous countries in the Global South displaying leadership in advancing policies.
Latin American countries including Brazil, Costa Rica, Colombia, and Mexico — along with Southeast Asian countries such as Malaysia, the Philippines, and Singapore — have begun incorporating nature-related issues. Some African countries like Morocco have also been developing regulatory initiatives. Meanwhile, the EU has taken significant steps with new prudential, corporate disclosure, and taxonomy regulations that address nature-related topics.
Using the Basel Committee on Banking Supervision’s global framework to examine how prudential requirements reflect the underlying risks faced by banks, we found that while jurisdictions are not yet incorporating nature-related risks in minimum capital and liquidity requirements under Pillar 1 of the framework, some regulators are reflecting nature-related risk in supervisory review of banks’ capital adequacy and risk management under Pillar 2 and prudential disclosures under Pillar 3.
Under Pillar 2, for example, Bank Negara Malaysia (BNM) provides recommendations for financial institutions to integrate sustainability, including nature-related risks, into their financing and investment decisions across various sectors. This includes detailed recommendations on biodiversity and ecosystem health, deforestation, water risks and pollution management. BNM has also recently announced a collaboration Together with the UN Development Programme and the World Bank to develop a nature-related financial risks assessment guide for Malaysian financial institutions.
Under Pillar 3, in 2024 Banco Central do Brasil initiated a public consultation of its Report on Social, Environmental and Climate Risks and Opportunities, which requires financial institutions to disclose information on governance, strategies over different time horizons, indicators for managing environmental risks, and related business opportunities.
Three dimensions for a holistic approach – and three key enablers
There is no one-size-fits-all approach to regulation development. However, a whole-of-government approach that includes three key dimensions can help these initiatives contribute coherently and synergistically to the urgent responses needed for minimizing risks from nature loss.
The first dimension is aligning public policies to address nature-related risks. When designing new prudential policy reform, the broader fiscal, regulatory and environmental tools should also be considered — and relevant public entities included in collaboration — to identify how policies interact to achieve desired outcomes and to ultimately present a cohesive policy package.
Integration of nature-related regulations across the policy landscape, from the report Navigating Nature-related Risks for Banks. © WWF / UNEP FI
Second, countries and regions should work towards enhanced global alignment. Considering the systemic and borderless impacts of the loss of nature and ecosystem services, global cooperation across jurisdictions is vital. Banks need globally consistent regulatory standards, guidance, and definitions to maximize comparability and interoperability of nature-related policies and regulations. Prudential frameworks need to employ coherent approaches across jurisdictions to better capture risk exposures from unsustainable economic activity.
Considering the systemic and borderless impacts of the loss of nature and ecosystem services, global cooperation across jurisdictions is vital.
Finally, as multilateral environmental agreements such as the Paris Agreement and the Global Biodiversity Framework recognize, and as we underscore in our report, climate-nature alignment is also crucial. Jurisdictions need to evaluate how policy responses can minimize trade-offs between these threats, and identify synergies between national climate plans and biodiversity plans.
A number of regulatory and supervisory authorities have implemented prudential guidelines incorporating both climate change and nature loss or ESG more broadly. For example, Singapore has developed guidelines that aim to enhance the banking sector’s resilience to and management of environmental risk through sound risk management practices for issues including climate change, loss of biodiversity, pollution, and changes in land use.
To help achieve this holistic approach, we have identified three key enablers:
- greater availability, reliability, and standardization of data that is decision-useful and enables banks to manage and disclose their risks, dependencies, and impacts on nature;
- risk measurement to account for complex characteristics of nature-related risks;
- internalization of environmental externalities within pricing mechanisms and/or by quantity restrictions to enable prudential risk management frameworks to reflect the impact of nature loss.
Takeaways on nature-related regulations for decision-makers
What does this mean for government policymakers in countries and regions still considering how best to address nature-related risks?
First, with the landscape analysis presented in our report, policymakers have an array of international examples they can review to evaluate which elements from different countries’ initiatives may be most applicable in their own national contexts.
Second, they can determine how to collaboratively advance the three key enablers of data availability, risk measurement, and internalization of environmental externalities within their own jurisdictions, and with regional and global alignment. As we share in more detail in the report, targeting policy approaches on these specific enablers helps to increase effectiveness.
Third, when developing their initiatives policymakers can consider their local context while prioritizing comparability and interoperability of nature-related policies and regulations across jurisdictions, to ensure an effective and responsive policy landscape for nature risks.
By taking this holistic approach, policymakers can develop effective strategies for addressing nature-related risks.
This article was originally published by Green Central Banking.
