Nature-related financial risks and central bank risk management

Abstract

Nature is undergoing a rapid decline, due to factors such as changes in land use, climate change and pollution, potentially leading to the sixth mass extinction of species. This process jeopardises ecosystem services and therewith the global economy. Over half of the global economy relies on nature and its degradation can affect supply chains, weather patterns, commodity prices and economic growth prospects. This paper finds that nature-related risks are in fact financial risks and offers empirical evidence that these risks are priced in corporate bonds, a relevant asset class for central banks. In light of this, central banks can acknowledge and evaluate the impact and dependency of their operations on nature, incorporating these considerations into their risk management framework, encompassing identification, assessment, mitigation and disclosure. This will help to ensure price stability and sustainable development, while enabling them to safeguard their balance sheets. The guidelines provided by this paper extend to other financial institutions, underscoring the need for a holistic approach to the challenges posed by nature loss.