Designing financial systems for a healthy planet

The financial sector is starting to respond to the threat of climate change

The Covid-19 pandemic is a wake-up call. Catastrophic as it has been for livelihoods and economies, its impacts may pale in comparison to those ahead if we continue to disregard the health of the planet and weaken natural systems.

Our broken relationship with nature, manifest in deforestation, land conversion, and depletion of natural capital, is not only increasing our exposure to infectious diseases and the likelihood of zoonotic spillover but also accelerating climate change, nature loss and water shortages. Taken together, these crises reinforce each other.

As we lose natural diversity and degrade ecosystem services, we radically restrict our opportunity to harness nature-based solutions to tackle climate change. In turn, climate breakdown further drives species extinction and lessens the resilience of natural systems. These risks could catastrophically destabilise our financial system and present an existential threat to the global economy and our future prosperity.

The good news is that the financial sector is starting to respond to climate-related financial risks. The Central Banks and Supervisors Network for Greening the Financial System is acknowledging finance as a powerful tool for change. Its goal is to share best practice on aligning financial flows with the Paris agreement.

Now, with COP26 in Glasgow just around the corner, there are growing global expectations for promises to be translated into action. On the biodiversity front, COP15 in Kunming, now scheduled for October, offers an opportunity for governments to negotiate a Paris-style agreement for nature which puts its global governance on a par with that for climate and sets nature on the path to recovery by 2030. If world leaders choose to build a truly resilient recovery from Covid-19, 2021 could be the decisive year in which we make progress on mitigating climate change while also addressing biodiversity loss.

At WWF – the world’s largest science-based conservation organisation – we are encouraging the financial sector to direct financial flows towards nature-positive investments and activities. A key focus is on accelerating the transition towards future-fit regulatory conditions that help systematically mobilise green capital.

We collaborate closely with central banks, financial supervisors and policy-makers to help translate their commitments on climate change into action. Our research on nature-related risks reveals their potential for significant economic and financial impacts. We are calling for:

  • assessment and management of climate-related and environmental financial risks
  • regulatory action and a precautionary approach to mitigating these risks and
  • adaptation of financial regulation to fully consider all risks and ensure harmonisation and convergence of practices.

To benchmark current practice, we published the Sustainable Regulations and Central Bank Policies (SUSREG) framework which helps assess the policies and actions that central banks, regulators and supervisors in 40 countries are adopting to create a greener financial system. The framework also provides a roadmap for financial regulators to take into account environmental and social risks and enhance the stability and resilience of the financial sector. Country-level assessment of relevant regulations and policies against the framework will be publicly available on an interactive online platform, facilitating comparison between countries and evidencing progress made.

Later this year, we will co-publish a paper on environmental risks driven by biodiversity loss as a source of systemic financial risk. This research will offer a scientific basis for meaningful dialogue with key stakeholders on the financial implications of biodiversity loss. We will provide regular overviews on data, tools and methodologies that can be used by financial institutions to quantify, understand and measure environmental risks.

To mitigate the devastating risks of irreversible climate breakdown and catastrophic nature loss, financial regulators need to act swiftly. Delaying action will only exacerbate growing climate-related and environmental risks, prolonging uncertainty in financial markets. Our Greening Financial Regulation initiative seeks to demonstrate that designing a financial system for a healthy planet is an indispensable part of building a resilient, nature-positive global economy ready to respond to emerging risks, and able to invest in bankable nature solutions and opportunities.

Working closely with our partners and responding to the challenges they face, we aim to offer central banks, financial supervisors and policy-makers clear analysis and practical insights on sustainable finance, enabling them to make the bold revisions to financial regulation that we need to avert future crises.

Margaret Kuhlow is Finance Practice Leader, WWF. Thomas Vellacott is CEO, WWF Switzerland.

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