SPEECH

Nature-related risk: legal implications for
central banks, supervisors and financial
institutions

Keynote speech by Frank Elderson, Member of the Executive Board
of the ECB and Vice-Chair of the Supervisory Board of the ECB, at
the ESCB Legal Conference 2024

Frankfurt am Main, 6 September 2024

As a lawyer, I am always glad to discuss the novel legal issues affecting the work of central banks and
supervisors.

At last year's conference I spoke to you about climate-related litigation and its impact on the financial
sector." This year I want to talk about the risks that nature degradation poses to the economy and the
financial sector.

As I have said before, assessing nature-related risk is not some kind of tree-hugging exercise. We are
talking about material financial risks, which - like any other type of risk - must be assessed, analysed
and managed.!2!

Today, I want to focus on the legal implications of nature-related risk for our central banking and
supervisory work. I will first outline the growing trend of nature-related litigation. Then I will look at how
nature-related risk should be considered in the context of the mandates of central banks and

supervisors.

Nature degradation: risks for the economy and the financial sector
Scientists worldwide agree that nature has been declining at an unprecedented rate over the past 50
years. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services
(IPBES) already sounded the alarm back in 2019, shortly before the outbreak of the global pandemic.
The IPBES report even warned us that nature degradation was exacerbating emerging infectious
diseases in wildlife, domestic animals, plants and people.)

The decline of nature is primarily caused by human activity and is being made worse by climate
change. Scientists have calculated that humanity is using natural resources 1.7 times faster than
ecosystems can regenerate them - in other words, we are consuming resources equivalent to 1.7

planet Earths./4]

This decline undermines the planet's ability to provide ecosystem services, which are the benefits we
obtain from nature to support and sustain our society and economies. Examples of ecosystem

services include food, drinking water, timber and minerals; protection against natural hazards, such as
floods and landslides; or carbon uptake and storage by vegetation.5]

The degradation of nature not only threatens these ecosystem services, but also increases the risk of
us reaching ecosystem tipping points, i.e. non-linear, self-amplifying and irreversible changes in

ecosystem states that can occur rapidly and on a large scale.[©] Through these tipping points, we are
at risk of going beyond the Earth's safe operating space for sustaining life on the planet.

From the perspective of central banks and supervisors, the degradation of nature makes our
economies, our companies and our financial institutions increasingly vulnerable.

We cannot ignore these vulnerabilities. Indeed, we need to deepen our understanding of how nature-
related financial risk affects the economy and the financial system.]

Work is progressing at the ECB: for example, our research has found that 72% of euro area
companies are highly dependent on ecosystem services and would experience critical economic

problems as a result of ecosystem degradation.!) Moreover, research by the European Commission
has detailed that several sectors of the European economy - in particular agriculture, real estate and
construction, and healthcare - are heavily dependent on nature and thus exposed to associated risks.
[10]

Work is also progressing at international level. The Financial Stability Board recently took stock of
supervisory and regulatory initiatives among its members and established that a growing number of
financial authorities are considering the potential implications of nature-related risks for the financial

sector." In addition, the Network for Greening the Financial System (NGFS) - a network of 138
central banks and supervisors from around the world - had already acknowledged the relevance of

nature-related risks for the mandates of central banks and supervisors back in March 2022.2] The

NGFS has since developed a conceptual framework offering central banks and supervisors a common
understanding of nature-related financial risks and a principle-based risk assessment approach.43]

All these efforts are improving our ability to quantify the financial implications of nature degradation.
And of course, there are also important legal implications that we need to start talking about.

Nature-related litigation

The first legal implication is the rise in nature-related litigation."4] Litigants are starting to understand
the link between climate change and nature degradation and are using the legal system to drive policy
change.

Building on their successes in the field of climate litigation, litigants are taking court cases to
address the biodiversity crisis, protect carbon sinks, limit deforestation and loss of ocean habitats, and
prevent ecosystem degradation.

In July of this year the NGFS published a report on this new trend to raise awareness among financial

institutions, central banks and supervisors." The report highlighted that while nature-related litigation
is still in its infancy, the number of cases is expected to grow rapidly.

The report reiterated that litigation can affect financial institutions, not only where they are directly
challenged, but also indirectly, when their counterparties, or the states in which they operate, are

subject to such claims. 48]

The report identified two key categories of nature-related litigation as well as two key drivers.

Categories of nature-related litigation
In terms of categories of litigation, most nature-related cases are being brought against states and

public entities, using arguments based on fundamental rights." This is not surprising given how

effective such arguments have been in climate litigation.

Interestingly, however, corporates and banks, too, are already being directly targeted in nature-related
litigation. This contrasts to the trends we saw under climate litigation, where cases against the private
sector were much slower to start.

First, this may be because climate litigation has offered a blueprint for action for litigants who are
seeking innovative ways to protect nature. Second, it may be because nature-related litigation can
identify a closer causal connection between the impact of economic activities on local ecosystems and
people. It is often easier to pinpoint the damage and attribute responsibility to specific actors. Thanks
to new legislation, it is also becoming easier to hold multinational companies liable for harm occurring
in remote parts of their global supply chains. And we can even see that litigants are already

challenging banks that are alleged to finance such companies. 2
Indeed, we can observe a close nexus between corporate litigation and legislation. Litigants are
already relying on new corporate sustainability due diligence legislation,!24] on tort law, anti-money

laundering laws!22] and shareholder rights to bring nature-related claims. The number of such cases is
likely to grow as further legislation - such as the EU Directive on corporate sustainability due diligence
and the EU Deforestation Regulation - enters into force.

Drivers of nature-related litigation

Looking now at the drivers behind the trend in nature-related litigation, the first is that scientists - and
litigants - are developing a much better understanding of the climate-nature nexus. Protecting nature
is crucial to mitigating climate change and vice versa. The climate crisis deepens the nature crisis,
thus diminishing nature's ability to mitigate what the UN Secretary General has called "the era of

global boiling".!23] The scientific consensus on this point may help litigants to strengthen their cases.
[24]

The second driver is that courts are taking, as a given, the findings of climate and environmental
science, in the same manner as any other area of technical expertise. Court assessments and rulings
are taking into account advanced scientific concepts and sources. We saw this quite clearly in the
recent ruling of the European Court of Human Rights, in the case brought by a group of Swiss

grandmothers.!25I There, the Court based its ruling on the IPCC reports, and took it as a matter of fact
that climate change exists, that it poses a serious threat to human rights, and that states are aware
and capable of doing something about it. Moreover, the Court held that states have a positive

obligation to act, regardless of whether their individual contribution might be a "drop in the ocean" in

terms of its ability to affect climate change.!24

Relevance of nature degradation for the mandates of central banks
and supervisors

This leads me to the next key legal implication of the nature crisis: how will it affect the mandates of
central banks and supervisors?

It goes without saying that addressing the nature crisis is primarily up to governments and legislators.
However, as I mentioned at the outset, central banks and supervisors also need to consider the nature
crisis as a source of risk to the economy, financial system and the individual banks they supervise.

Nature-related risk and banking supervision

Avery clear example of this is the way banking supervision is looking at nature-related risks. Back in
2020, the ECB's guide on supervisory expectations for the risk management of climate-related and
environmentall24 (C&E) risks already highlighted the need for banks to identify, measure and - most
importantly - manage nature-related risks, such as water stress and pollution.!28]

We have been actively following up with banks regarding these supervisory expectations since then.

(291 The first interim deadline fell due in March 2023, when banks were expected to have in place a
sound and comprehensive materiality assessment of both climate and nature risks. Since then, we
have issued binding supervisory decisions against 28 banks that failed to meet this first interim
deadline - with the possibility of imposing periodic penalty payments in the 22 most relevant cases, if
the banks don't remedy this shortcoming in time.

Banks were also expected to meet a second interim deadline in December 2023, and by the end of
this year, we expect all banks under our supervision to be fully aligned with all our supervisory
expectations on the sound management of C&E risks.

In that respect, nature degradation is already integrated in ECB supervisory work as a risk driver that
banks are expected to manage. Rather than considering nature-related risk as a standalone category
of risk, we see it as a driver for each traditional type of risk reflected in the Capital Requirements
Directive, from credit risk, reputational and operational risk including legal risk, to market and liquidity
risk.

Nature-related risk and monetary policy
We must also properly consider nature-related risk in the context of our monetary policy mandate.

First, the nature crisis could have direct implications for price stability - the primary objective of the
ECB. One of the papers presented at the annual ECB Forum on Central Banking in Sintra, Portugal, in
July shows how loss of biodiversity can cause losses to economic output while at the same time

decreasing the resilience of output to future biodiversity losses.!S2]
As part of its Climate and Nature Plan 2024-2025, the ECB is conducting further work on the risk

posed to the economy by nature loss and degradation.) This will inform our understanding of risks to

price stability and financial stability.
Second, it is clear from the Treaties that the ECB must take into account the EU's policies to address

nature degradation when carrying out its mandate.!22] There are two key legal bases for this: the
ECB's secondary objective in Article 127(1), second sentence, and the transversal Treaty provisions of
Articles 11 and 7 of the Treaty on the Functioning of the European Union (TFEU).

The ECB's secondary objective states that, without prejudice to price stability, the ECB shall support
the general economic policies in the EU, with a view to contributing to the objectives of the EU. These
objectives include "the sustainable development of Europe" and "a high level of protection and
improvement of the quality of the environment". It is irrefutable that the EU's climate policy constitutes
part of the general economic policies in the EU. As reiterated in the European Climate Law, the
transition to net zero affects every aspect of economic life, in all sectors. Thus, to the extent that
nature protection directly contributes to climate crisis mitigation and adaptation - which it often does -
the ECB must support the EU's efforts in this field. In this context it is notable that the EU adopted the

groundbreaking Nature Restoration Law earlier this year23) and signed up to the Kunming-Montreal

Global Biodiversity Framework (the "Paris Agreement for nature") in 20221841 _ significant
developments that could be invoked to argue that nature protection, just like climate policy, constitutes
an independent general economic policy. As lawyers, we need to watch this space.

Beyond the secondary objective, the ECB has to comply with two key transversal principles of the
Treaties. Article 11 of the TFEU provides that the EU's environmental protection requirements must be

"integrated into the definition and implementation of the Union's policies and activities".25] This
imposes an obligation on the ECB to take into account the EU's policies to protect nature when
shaping its own policies and performing its tasks. In addition, under Article 7 of the TFEU, the activities
and policies of the ECB need to be consistent with EU law - including EU law on nature and
biodiversity.

This does not mean economists should start counting ants in Aragon, butterflies in Bavaria or worms in
Wallonia. Instead, economists must develop means to transpose insights from nature science into
variables of economic interest like growth, inflation and financial risks.

In developing tools for policy analysis of nature-related risks, the growing availability of data from
sustainability disclosures will make it easier for central banks to identify how they need to incorporate
nature into their work. Recently adopted legislation, in particular the sustainable finance framework[25],
creates an entire "ecosystem" of EU legislation that makes the link between nature degradation, the
economy and the financial sector - and thus central banks and supervisors - clear and apparent. It
leaves us in no doubt that we have the duty and the tools at our disposal to take nature-related risk
into account when we exercise our mandate.

Conclusion
Let me conclude.

The economy and the financial sector are vulnerable to nature-related risks. This vulnerability is all the
more relevant given the importance of nature in mitigating and adapting to climate change.

Time is running out to prepare for the materialisation of nature-related risks. We need to be ready for
the impact of these risks, just like we are for climate-related risks - or indeed for any other risk driver.

For that reason, we need to properly consider the legal implications of nature-related risks for the
financial sector, and for the mandates of central banks and supervisors.

Thank you for your attention.

1.

Elderson, F. (2023), ""Come hell or high water": addressing the risks of climate and environment-

related litigation for the banking sector", keynote speech at the ECB Legal Conference, 4 September.

2.
Elderson, F. (2023), "Climate-related and environmental risks - a vital part of the ECB's supervisory

agenda to keep banks safe and sound", introductory remarks at the panel on green finance policy and

the role of Europe organised by the Federal Working Group Europe of the German Greens, 23 June.

3.

summary for policymakers, IPBES secretariat, Bonn, Germany.

4.

Lin, D., Hanscom, L., Murthy, A., Galli, A., Evans, M., Neill, E., Mancini, M.S., Martindill, J., Medouar,
F.-Z., Huang, S. and Wackernagel, M. (2018), "Ecological Footprint Accounting for Countries: Updates
and Results of the National Footprint Accounts, 2012-2018", Resources, Vol. 7, No 3, p.58.

5.
NGFS (2024), Nature-related Financial Risks: a Conceptual Framework to guide Action by Central

Banks and Supervisors, July.

6.

Marsden, L. et al. (2024), "Ecosystem tipping points: Understanding risks to the economy and financial

system", UCL Institute for Innovation and Public Purpose, Policy Report, April.
7.
NGFS (2024), Nature-related Financial Risks: a Conceptual Framework to guide Action by Central

Banks and Supervisors, July.

8.
Elderson, F. (2023), "Ihe economy and banks need nature to survive", The ECB Blog, 8 June;
Lagarde, C. (2024), "Central banks in a changing world: the role of the ECB in the face of climate and

environmental risks", speech at the Maurice Allais Foundation, 7 June.

9.

Boldrini, S. et al. (2023), "Living in a world of disappearing nature: physical risk and the implications for

financial stability', Occasional Paper Series, No 333, ECB, Frankfurt am Main, November.
10.
Cziesielski, M. et al. (2024), Study for a methodological framework and assessment of potential

financial risks associated with biodiversity loss and ecosystem degradation - Final Report, European

Commission, Brussels, March. These sectors are vulnerable to risks such as water scarcity, floods,
storms, soil erosion, pests and invasive species, loss of pollinators and disease (including microbial

resistance).

11.

perspectives on financial risk, 18 July.

12.

NGFS (2022), Statement on nature-related financial risks, 24 March.

13.

NGFS (2024), Nature-related Financial Risks: a Conceptual Framework to guide Action by Central

Banks and Supervisors, July.

14.

The NGFS defines nature-related litigation as encompassing all strategic claims brought before judicial
bodies, focusing on climate, biodiversity loss and ecosystem services degradation.

15.

NGFS (2023), Climate-related litigation: recent trends and developments, September.

16.
Setzer, J. and Higham, C. (2024), Global trends in climate change litigation: 2024 snapshot, London,

June.

17.

NGFS (2024), Nature-related litigation: emerging_trends and lessons learned from climate-related
litigation, 2 July.

18.

See also Solana, J. (2020), "Climate change litigation as financial risk", Green Finance, Vol. 2, Issue 4,
p. 344.

19.

Rodriguez-Garavito, C. and Boyd, D. (2023), "A Rights Turn in Biodiversity Litigation?" Transnational

Environmental Law, Vol.12, No 3, p. 498.

20.

See for example Comissao Pastoral da Terra and Notre Affaire a Tous v. BNP Paribas. This case is still

pending.
21.
For example, cases have been brought against corporates under the French "duty of vigilance" law,

such as ClientEarth, Surfrider Foundation Europe, and Zero Waste France v. Danone and Envol Vert

v. Casino. These cases are still pending.

22.

For instance, a complaint has been brought against banks in France, citing financial support to
companies implicated in alleged illegal deforestation in the Amazon. A different application has also
been filed before the UK courts against an exchange operator, in connection with the trading of metals

which are allegedly the proceeds of environmental crimes.

23.
The Secretary-General noted: "The era of global warming has ended; the era of global boiling has
arrived.", see Guterres, A. (2023), "Press conference by Secretary-General Antonio Guterres on

climate", 27 July.

24.

For instance, the Intergovernmental Panel on Climate Change (IPCC) has emphasised that
safeguarding biodiversity and ecosystems is fundamental to climate resilient development, in the light
of the threats posed by climate change to nature and its roles in adaptation and mitigation.

Intergovernmental Panel on Climate Change (2022), "Summary for Policymakers", in IPCC, Climate

Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth
Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press,
Cambridge, pp. 3-33.

25.

European Court of Human Rights (2024), "Judgment Verein KlimaSeniorinnen Schweiz and Others v.

Switzerland - Violations of the European Convention for failing to implement sufficient measures to

combat climate change", press release, 9 April.

26.
See also Kotze, L. et al. (2024), "Courts, climate litigation and the evolution of earth system law",
Global Policy, 15, 5-22.

27.

Here, I use the terms "environmental" and "nature-related" risk interchangeably.

28.

ECB (2020), Guide on climate-related and environmental risks - Supervisory expectations relating to

risk management and disclosure, Frankfurt am Main, November. See also ECB (2022), Good

practices for climate-related and environmental risk management - observations from the 2022

thematic review, Frankfurt am Main, November; ECB (2022), Walking the talk: Banks gearing_up to

manage risks from climate change - results of the 2022 thematic review on climate-related and

environmental risks, Frankfurt am Main, November.
29.
Elderson, F. (2024), "You have to know your risks to manage them - banks' materiality assessments

as_a crucial precondition for managing climate and environmental risks", ECB Blog, 8 May. For further

background, see Elderson, F. (2021), "Mapping connected dots: how climate-related and

environmental risk management is becoming _a reality", speech at a workshop organised by the

International Monetary Fund's South Asia Regional Training and Technical Assistance Center and

Monetary and Capital Markets Department, 10 December; Elderson, F. (2022), "Good, bad and

hopeful news: the latest on the supervision of climate risks", speech at the 10th Annual Conference on

Bank Steering & Bank Management at the Frankfurt School of Finance & Management, 22 June;

Elderson, F. (2023), "'Running_up that hill" - how climate-related and environmental risks turned

mainstream in banking supervision and next steps for banks' risk management practices", speech at

the ECB Industry Outreach event on Climate-related and Environmental Risk, 3 February; Elderson, F.
(2023), "Climate-related and environmental risks - a vital part of the ECB's supervisory agenda to

keep banks safe and sound", speech at the panel on green finance policy and the role of Europe

organised by the Federal Working Group Europe of the German Greens, 23 June; Elderson, F. (2024),

"Making _banks resilient to climate and environmental risks - good practices to overcome the remaining

stumbling blocks", speech at the 331st European Banking Federation Executive Committee meeting,

14 March; Elderson, F. (2024), "Know thyself - avoiding policy mistakes in light of the prevailing

climate", speech at the Delphi Economic Forum IX, 12 April.

30.

Kuchler, T. et al. (2024), The economics of biodiversity loss, ECB Forum on Central Banking, June.

31.
ECB (2024), Climate and nature plan 2024-2025 at a glance.

32.

O'Connell, M. (2024), "Birth of a naturalist? Nature-related risks and biodiversity loss: legal

implications for the ECB", ECB Legal Working Paper Series, No 22, Frankfurt am Main, June.
33.

restoration and amending Regulation (EU) 2022/869 (OJ L, 2024/1991, 29.7.2024).


34.

Kunming-Montreal Global Biodiversity Framework (GBF) was agreed on 18 December 2022.
35.

This "principle of integration" is also reflected in Article 37 of the Charter of Fundamental Rights.

36.

In particular, the Taxonomy Regulation targets not only climate mitigation and adaptation, but also four

further environmental objectives relevant to nature; the Sustainable Finance Disclosure Regulation

(SFDR) defines "sustainable investments" with reference to the impact on biodiversity and nature; and

substantial disclosure requirements related to nature.

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