Even though the global economy depends on a stable climate and reliable ecosystem services, businesses and financial institutions are not required or incentivized to invest in nature. Central banks and supervisors could change that trajectory simply by fulfilling their financial-stability mandate.
NEW YORK – The ten most expensive climate disasters of 2024 – the hottest year on record – cost more than $229 billion, while extreme weather events have left fewer and fewer countries unscathed. Deadly floods in China, Germany, and Kenya, scorching heat waves in India, prolonged droughts in Brazil, and, most recently, major wildfires in the United States and Ghana highlight the increasingly severe ripple effects of nature degradation and climate change on economies and societies.
The global economy depends on a stable climate and reliable ecosystem services, including the provision of fresh water, healthy air, erosion and flood control, pollination, climate regulation, and carbon sequestration. According to the European Central Bank, nearly 75% of all eurozone bank loans are provided to firms that are highly dependent on at least one these ecosystem services.
The economic implications of this dependence are profound. In the United Kingdom, environmental degradation could cause a 12% contraction in GDP – worse than the hit caused by COVID-19 – if left unaddressed. An analysis of nature-related risks in Hungary found that in the absence of adequate mitigation strategies, severe drought could double the volume of non-performing loans, increase sovereign debt, and reduce economic output by 4-7% in a single year. And a World Bank analysis of 20 emerging markets found that 55% of bank loans, on average, are exposed to activities that are highly or very highly dependent on at least one ecosystem service. It turns out that a stable financial system is highly dependent on nature, and nature is increasingly in crisis.
Although these risks are increasingly well understood by central banks, businesses and financial institutions are not required or incentivized to invest in protecting nature. In fact, nearly $7 trillion of public and private finance per year supports activities that damage forests, pollute water sources, and destroy biodiversity – 35 times the amount of investment in nature-positive initiatives.
Central banks and financial supervisors are well placed to change this trajectory and chart a new course toward a more resilient global economy. These authorities must start adapting their risk assessments and transition plans to the new climate reality and use their ability to influence the financial system through monetary policy, supervision, and regulation. Importantly, as ECB executive board member Frank Elderson has pointed out, preventing macroeconomic instability requires central banks and supervisors to consider climate- and nature-related risks together. The science is increasingly clear that failure to do so will lead to an increase in food insecurity, forced displacement, and overlapping shocks.
These outcomes are already a daily reality in many parts of the world. In 2024, global cocoa prices reached an all-time high, partly owing to adverse climate conditions in Ghana, the world’s second-largest producer. As it becomes harder to earn a livelihood from agriculture, many farmers in Ghana are selling their land to galamsey (illegal or informal small-scale mining) operators, or are becoming illegal miners themselves, further eroding local ecosystems.
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A recent report from NatureFinance (of which I am CEO), the ECB, the Potsdam Institute for Climate Impact Research, and the University of Minnesota shows that focusing only on climate policies heightens both economic and environmental risks. For example, large-scale, land-based carbon-sequestration measures, such as monoculture afforestation projects, can lead to lower species diversity and significant biodiversity loss. The subsequent loss of pollinators can then affect crop yields, undermining the long-term sustainability of global food production for both farmers and consumers. Ultimately, this means that well-intentioned but narrowly conceived policies to reduce carbon emissions can inadvertently undermine biodiversity and ultimately worsen rather than mitigate the climate crisis.
Integrating climate and nature policies, alternatively, can help stabilize the agriculture sector, curb biodiversity loss, and limit temperature increases. Though far from a silver bullet, such an approach would go a long way toward breaking what has become a vicious cycle of nature loss and accelerated climate impacts.
Unfortunately, the growing body of evidence concerning how nature degradation and climate change are linked to price stability and the financial system is at odds with the current political zeitgeist. Donald Trump’s return to the White House has further accelerated an already growing backlash against environmental, social, and governance (ESG) efforts in the US and Europe. The Federal Reserve recently withdrew from the Network for Greening the Financial System, a group of more than 100 central banks and supervisors working to improve climate-risk management in the financial sector. Ahead of Trump’s inauguration, major commercial banks and asset managers quit climate-action networks, while Texas and other states sued prominent money managers, arguing that they conspired against coal markets by integrating environmental risk into their investment strategies.
The rise of climate denialism on both sides of the Atlantic has pushed ambitious action to protect the financial system from nature- and climate-related shocks off the agenda for now. But central banks and supervisors still have many powerful tools at their disposal to guard against the devastating consequences of environmental disruption. They can require commercial banks and insurers to assess, report on, and stress-test their portfolios for nature- and climate-related risks and dependencies. They can set limits on investment exposure to assets or sectors that are particularly vulnerable to such risks. And they can give preferential treatment to more resilient and adaptive green assets and sectoral strategies in their collateralization frameworks and targeted refinancing operations.
Even as business, financial, and political leaders willfully ignore the overwhelming scientific and economic consensus in their decision-making, central banks can still move us toward an economy that is better protected against the mounting shocks of the nature and climate crisis. All they need to do is fulfill their financial-stability mandate.
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NEW YORK – The ten most expensive climate disasters of 2024 – the hottest year on record – cost more than $229 billion, while extreme weather events have left fewer and fewer countries unscathed. Deadly floods in China, Germany, and Kenya, scorching heat waves in India, prolonged droughts in Brazil, and, most recently, major wildfires in the United States and Ghana highlight the increasingly severe ripple effects of nature degradation and climate change on economies and societies.
The global economy depends on a stable climate and reliable ecosystem services, including the provision of fresh water, healthy air, erosion and flood control, pollination, climate regulation, and carbon sequestration. According to the European Central Bank, nearly 75% of all eurozone bank loans are provided to firms that are highly dependent on at least one these ecosystem services.
The economic implications of this dependence are profound. In the United Kingdom, environmental degradation could cause a 12% contraction in GDP – worse than the hit caused by COVID-19 – if left unaddressed. An analysis of nature-related risks in Hungary found that in the absence of adequate mitigation strategies, severe drought could double the volume of non-performing loans, increase sovereign debt, and reduce economic output by 4-7% in a single year. And a World Bank analysis of 20 emerging markets found that 55% of bank loans, on average, are exposed to activities that are highly or very highly dependent on at least one ecosystem service. It turns out that a stable financial system is highly dependent on nature, and nature is increasingly in crisis.
Although these risks are increasingly well understood by central banks, businesses and financial institutions are not required or incentivized to invest in protecting nature. In fact, nearly $7 trillion of public and private finance per year supports activities that damage forests, pollute water sources, and destroy biodiversity – 35 times the amount of investment in nature-positive initiatives.
Central banks and financial supervisors are well placed to change this trajectory and chart a new course toward a more resilient global economy. These authorities must start adapting their risk assessments and transition plans to the new climate reality and use their ability to influence the financial system through monetary policy, supervision, and regulation. Importantly, as ECB executive board member Frank Elderson has pointed out, preventing macroeconomic instability requires central banks and supervisors to consider climate- and nature-related risks together. The science is increasingly clear that failure to do so will lead to an increase in food insecurity, forced displacement, and overlapping shocks.
These outcomes are already a daily reality in many parts of the world. In 2024, global cocoa prices reached an all-time high, partly owing to adverse climate conditions in Ghana, the world’s second-largest producer. As it becomes harder to earn a livelihood from agriculture, many farmers in Ghana are selling their land to galamsey (illegal or informal small-scale mining) operators, or are becoming illegal miners themselves, further eroding local ecosystems.
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A recent report from NatureFinance (of which I am CEO), the ECB, the Potsdam Institute for Climate Impact Research, and the University of Minnesota shows that focusing only on climate policies heightens both economic and environmental risks. For example, large-scale, land-based carbon-sequestration measures, such as monoculture afforestation projects, can lead to lower species diversity and significant biodiversity loss. The subsequent loss of pollinators can then affect crop yields, undermining the long-term sustainability of global food production for both farmers and consumers. Ultimately, this means that well-intentioned but narrowly conceived policies to reduce carbon emissions can inadvertently undermine biodiversity and ultimately worsen rather than mitigate the climate crisis.
Integrating climate and nature policies, alternatively, can help stabilize the agriculture sector, curb biodiversity loss, and limit temperature increases. Though far from a silver bullet, such an approach would go a long way toward breaking what has become a vicious cycle of nature loss and accelerated climate impacts.
Unfortunately, the growing body of evidence concerning how nature degradation and climate change are linked to price stability and the financial system is at odds with the current political zeitgeist. Donald Trump’s return to the White House has further accelerated an already growing backlash against environmental, social, and governance (ESG) efforts in the US and Europe. The Federal Reserve recently withdrew from the Network for Greening the Financial System, a group of more than 100 central banks and supervisors working to improve climate-risk management in the financial sector. Ahead of Trump’s inauguration, major commercial banks and asset managers quit climate-action networks, while Texas and other states sued prominent money managers, arguing that they conspired against coal markets by integrating environmental risk into their investment strategies.
The rise of climate denialism on both sides of the Atlantic has pushed ambitious action to protect the financial system from nature- and climate-related shocks off the agenda for now. But central banks and supervisors still have many powerful tools at their disposal to guard against the devastating consequences of environmental disruption. They can require commercial banks and insurers to assess, report on, and stress-test their portfolios for nature- and climate-related risks and dependencies. They can set limits on investment exposure to assets or sectors that are particularly vulnerable to such risks. And they can give preferential treatment to more resilient and adaptive green assets and sectoral strategies in their collateralization frameworks and targeted refinancing operations.
Even as business, financial, and political leaders willfully ignore the overwhelming scientific and economic consensus in their decision-making, central banks can still move us toward an economy that is better protected against the mounting shocks of the nature and climate crisis. All they need to do is fulfill their financial-stability mandate.