It is becoming increasingly clear that nature loss is posing systemic risks to economic and financial stability globally. Ceres estimates that the cumulative economic costs of nature degradation over the next five years will reach $1.5tn if the loss of critical ecosystem services is left unchecked. The banking sector therefore has a direct stake in addressing the degradation of nature.
The chain of risks triggered by nature loss and degradation cascades through ecosystems to every aspect of the financial system. If poorly managed, these risks can raise costs, reduce productivity and destabilise supply chains, contributing to higher inflation, reduced output and sector-wide instability, before materialising as financial risks through credit loss, asset repricing, rising insurance claims and strategic or operational challenges for financial institutions.
Understanding nature-related banking regulations
Modelling the full impact of this is complicated. In a summary note earlier this year, the Network for Greening the Financial System observed that: ‘Nature-related risks… are more complex than climate-related ones, notably given the large number of different ecosystems that are subjected to degradation and their geographical specificities.’
This complexity means that existing models for assessing nature-related risks are some way behind those for climate, and banks are not yet fully equipped with the insights required for robust policy and investment decisions.
However, various jurisdictions, including China and the European Union, have begun accounting for nature-related risks in their prudential regulations. Across the policy landscape, China and the EU are both developing nature-related sustainable finance frameworks through different legal and institutional pathways.
A new United Nations Environment Programme Finance Initiative policy brief, ‘Nature-related regulation of banks in China and the EU: A comparative landscape analysis’, examines how nature-related considerations are being incorporated into banking-relevant regulations across these two major economic and financial systems. It aims to help financial sector practitioners and policy-makers understand these developments within a rapidly evolving global landscape, focusing on three domains of nature-related sustainable finance regulation: environmental policies, corporate regulation and related market frameworks, and prudential regulation and supervision.
Comparing approaches
As nature-related factors become more frequently considered alongside longer-established climate-related elements, financial institutions are navigating a growing range of regulatory expectations, disclosure requirements, and taxonomy and supervisory schemes. Understanding how these frameworks are developing across jurisdictions has become increasingly relevant for both banks and regulators.
Both China and the EU have expressed commitment to implementing the Kunming–Montreal Global Biodiversity Framework and other multilateral environmental agreements through their respective environmental policy frameworks. China combines centrally coordinated strategic guidance, shaped by the concept of ‘ecological civilisation’, with local pilot experimentation, while the EU operates through a multi-level governance structure combining EU-wide regulations with national transposition of directives. The resulting policies shape the operating environment of banks’ clients and, consequently, banks’ lending and investment portfolios.
In both jurisdictions, taxonomy and disclosure frameworks have expanded their treatment of environmental topics beyond climate. While the respective frameworks differ in structure, legal basis and scope, they are becoming increasingly relevant sources of information for financial institutions seeking to understand nature-related risks and impacts associated with lending and investment activities.
The UNEP FI brief also reviews how supervisors and regulators in China and the EU are approaching nature risks within banking regulation and supervision, including developments related to governance, risk management, supervisory review processes and prudential disclosures. It finds that, while nature-related prudential measures are at an earlier stage compared to climate-related considerations, approaches continue to evolve and rapidly gain relevance.
Evolving expectations
As two major economic and financial systems that are closely connected through trade, investment and cross-border financial activity, regulatory developments in China and the EU may influence risk management, reporting practices and sustainable finance implementation both in each other’s and beyond their own markets.
While China and the EU are both integrating nature-related considerations through different institutional, legal and technical pathways, their shared participation in international platforms such as the Network for Greening the Financial System, the International Platform on Sustainable Finance and the G20 can help enable innovative and consistent regulatory development, transparency and implementation across jurisdictions. It also gives rise to opportunities for mutual learning, technical exchange and improved comparability in approaches to nature-related financial regulation.
Across both jurisdictions, nature-related regulation is moving from voluntary market guidance towards more mandatory expectations. Banks can prepare by building nature-risk capabilities, enhancing client engagement on transition planning, developing expertise in biodiversity, water and land-use risks, and closely monitoring evolving Chinese and EU requirements as regulatory expectations develop.
The policy brief is part of UNEP FI’s Asia Pacific Policy Brief series and builds on UNEP FI’s broader work on sustainable finance regulation, nature-related financial risks and the evolving role of the financial sector in responding to environmental challenges. Read the policy brief, and register for the UNEP FI Regulatory Implementation Support Programme webinar, featuring a panel of experts exploring the prudential perspective of nature-related regulations in greater depth.
Mia Brinkmann is Global Policy Analyst and Laura Canas da Costa is Co-lead, Global Policy Team, United Nations Environment Programme Finance Initiative. Sarah Moloney is Editorial Director at OMFIF.
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