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DNB-OMFIF Conference on Biodiversity Amsterdam, 29 September 2022
what we do know, what we don't
Biodiversity, macroeconomics and finance:
know yet, and what we have to do
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Ladies and Gentlemen,
It is a great pleasure to be with you again today at this DNB-OMFIF conference
on biodiversity. Let me start by sharing a memory: more than four years ago, I
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was here in Amsterdam for the very first conference of the nascent NGFS and
I must pay tribute to its first Chair Frank Elderson to whom we collectively owe
a great deal for his passionate leadership on climate but also nature-related
green finance to be the "new frontier for the 21st
issues. At the time I called for
century". -
The substantial progress made since then on climate change
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disclosure, stress tests, greening of the monetary policy is undoubtedly a
source of optimism; but it also gives rise to two concerns : (i) despite this
progress, the fight against climate change is far from over (ii) on biodiversity,
which we are discussing today, our knowledge and tools lag several years
behind those on the climate. Today, I would like to share with you clearly and
purposefully what we already know (A), and what we don't know yet (B), before
reflecting on what we have to do (C).
A. What we do know
1. We are facing an alarming loss of biodiversity
We can no longer ignore the warnings of a "Silent Spring".i We are currently
facing a global change in fauna and flora: some are rarefying or disappearing,
while others are now thriving in environments that were until recently not suited
for them. The figures are quite telling: 25% of studied species are threatened
with extinction; scientist are talking about an ongoing 6th mass extinction, the
first one caused by humankind.
Yet, biodiversity is key to the resilience of ecosystems, which provide
unaccounted for but essential services that sustain life on our planet, what we
call
"ecosystem services". To put it in economic terms, they include the
provision of basic but essential goods such as food, wood, water, etc., but also
regulation services such as climate regulation, water purification or pollination.
The deterioration of nature through deforestation, plastic and chemical pollution
and overconsumption obviously alters the provision of those services. Since
1970, 14 out of the 18 categories of ecosystem services have declined
according to the Intergovernmental Science-Policy Platform on Biodiversity and
Ecosystem Services (IPBES). Some of these ecosystems are critical to human
life and activity: pest and disease control is an alarming example, with scientists
warning of an "Era of pandemics" if we do not tackle the biodiversity crisis.ii
2. These biodiversity losses pose significant risks to economic growth
and the financial system
For centuries, human societies, economic activities and finance were very much
embedded in nature: loan schedules for example were indirectly shaped by the
rhythm of the seasons. Nowadays, the vast majority of economic agents act as
"disembedded" from nature
if our economies were completely
(Dasgupta, 2021):iii we even call the impacts we have on nature "externalities".
But facts do not cease to exist because they are ignored: our economies are
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deeply dependent on ecosystems. More than half of global GDP i.e. 44 trillion
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USD of economic value generation is estimated as moderately or highly
iv
dependent on ecosystem services (WEF/Herweijer et al., 2020). Moreover, the
total value of the ecosystem services we consume almost for free may amount
to more than annual global GDP (Costanza et al., 2014).v
Because financial institutions support the development of economic activity, our
financial system is also clearly exposed to biodiversity loss. The joint study
group NGFS-INSPIRE thankfully released an insightful report in Marchvi
highlighting the financial stability implications of nature-related risks, especially
those associated with biodiversity loss. Biodiversity-related risks can be
understood as physical and transition risks, which reminds us the schemes
used to analyse climate-related risks. Physical risks stem from the dependency
of economic activities on ecosystem services and their vulnerability in the case
of disruption; transition risks result from the impact of these activities on
biodiversity, which makes them vulnerable to transition policies. As an
illustration, recent research showed that exposure to degraded land could
impact the value of listed companies in the food supply chain in Brazil: the
market value of farmers operating on degrading land declined by 13 per cent
following extreme weather, while those on healthy soils increased by 6 per
cent.vii
3. Climate change, biodiversity loss and other nature-related risks are
intricately linked
First, biodiversity-related risks and climate-related risks are deeply intertwined,
- what we call the
and subject to feedback phenomena "climate-biodiversity
nexus".
Climate change is indeed already the third driver of biodiversity loss
behind land use change and overexploitation of living organisms; in turn, the
loss of biodiversity undermines the capacity to adapt to and mitigate climate
change. The canonical example of Amazonian deforestation is prime evidence
of the synergies between these drivers: the Amazon rainforest is both a carbon
reserve and a unique ecosystem hosting many endangered species. In fact,
nature-based solutions represent several of the most valuable options to
progress toward net zero according to the IPCC.viii
These interdependences also extend to several other aspects of nature-related
risks: for example, both climate and land-use change drive imbalances in
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freshwater availability, notably caused by droughts which we have been
Let's acknowledge that so far, the contours of
acutely aware of lately. nature-
related risks are more vague, as they relate to risks posed by any phenomena
relating to nature. We still have here a definition challenge. The variety of
interactions and overlaps between climate-related risks, biodiversity-related
risks and other nature-related risks is precisely what is being studied at the
NGFS taskforce, which I will speak about later.
A useful approach on which experts are currently drawing to sum up the different
risk is that of
facets of nature-related "planetary boundaries". According to the
latest assessment, six out of the nine planetary boundaries have been crossed,
increasing the risk of reaching a tipping point, past which our impact on the
planet could prove irreversible. These limits include climate change and
biodiversity loss, but also freshwater use, deforestation and land use, pollution,
ozone depletion for example; each of these boundaries interacts significantly
with the others.
Let us not fool ourselves: these interconnections generate a heated political
debate. Many advocate for priority to be given to climate-risks, as we know them
better, and as we have the right instruments at our disposal. Some of those who,
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on the contrary, support a broad approach to environmental risks like the
- aim in reality at "diluting" the climate priority.
former American administration
Today, I would like to call for extending our scope progressively but with
ambition. First, climate change, on which we must proceed as swiftly as
possible; second, biodiversity, which is at an intermediary stage; third, other
economically material nature-related risks, including air and water pollution, land
use, etc. to the extent they are not already covered as we work on climate and
biodiversity. I can only wish for a holistic approach someday; but we certainly
cannot wait until we know everything on all nature-related risks before we act
on climate.
What we don't know yet
B.
Drawing a parallel with the progress made on climate, we face two significant
metrics and scenarios ("IPCC type")
challenges ahead for biodiversity issues:
and macroeconomics and finance ("NGFS
type").
1. Biodiversity metrics and scenarios
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Biodiversity and even more so nature is complex and multidimensional: for
example, biodiversity measurement cannot be reduced to a single metric like
the concentration of greenhouse gas in the atmosphere and the associated rise
in temperature for climate change. We still lack understanding on, and
especially awareness of, this phenomenon. Thankfully, the IPBES, which we
could describe as the IPCC equivalent for biodiversity, is advancing knowledge
and raising awareness about biodiversity. It provides landmark assessments of
biodiversity loss and ecosystem services, including work on scenarios that we
could explore further as we aim for improved risk assessment by the financial
sector, just like we did with IPCC scenarios.
When attempting to assess risks, we are indeed confronted with numerous
conceptual challenges that require adapted tools: the diversity of drivers and
impacts; uncertainty over the time horizon (which may be relatively short for
biodiversity-related risks), the importance of tail risks and non-linearities
associated with tipping points; the limited substitutability of ecosystem services
(for instance, forests provide flood protection services that can only partially be
replaced by costly infrastructure, while ignoring many other services provided
by forests), interdependencies between phenomena (climate change,
biodiversity, land use pollution and fresh water use, as mentioned earlier), etc.
A particular issue relates to the need for data and metrics, which is targeted by
several initiatives. These include the Global Biodiversity Score (GBS),
developed by CDC Biodiversité using the GLOBIO model of the Netherlands
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Environmental Assessment Agency (PBL) hence a good example of fruitful
French-Dutch cooperation. This tool assesses the impacts of economic activities
on biodiversity and synthetizes them into one metric, the Mean Species
Abundance (MSA) km2. It can be applied at the level of individual companies,
but also allows for a global measure of our impacts: in 2010, losses were
equivalent to 32% of biodiversity globally; by 2050, it is estimated that such
losses could increase to 41.5%. Such an aggregated metric is not a silver bullet,
but it helped us to better understand the materiality of the issues.
Advances on these metrics will further enable efforts to bring forward
biodiversity-related disclosure. Globally, the Taskforce on Nature-related
Financial Disclosure (TNFD), a market-led initiative set up by two UN
Programmes and the WWF in cooperation with major development banks, aims
at extending the success of TCFD, its equivalent for climate-change: allow for
enhanced disclosure and management of nature-related risks and opportunities;
I would like to commend the commitment of the Dutch and the French financial
sector in this respect; while closer connection between the TNFD and the NGFS
will certainly prove beneficial. Meanwhile, EU regulation on corporate
disclosures aims at encompassing a wide range of environmental objectives,
including biodiversity.
2. Macroeconomics and macrofinance of biodiversity
Despite data gaps and the lack of commonly accepted methodologies for
translating biodiversity metrics into the financial world, the central bank
community is starting to assess the implications of biodiversity loss and other
nature-related risks for the financial system.
Building on a pioneering methodological work of DNB (van Toor et al., 2020)ix
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the first biodiversity report published by a central bank complemented by
similar studies in Brazil, Malaysia and Mexicox, fruitful research at the Banque
de France ("A 'silent spring' for the financial system?", 2021)xi
provides such an
exploration of biodiversity-related risks for the French financial system. To
approximate physical risks, the authors assess the dependency on ecosystem
services of each security issuers financed by French financial institutions, using
a dependency score computed with the ENCORE database. The authors found
that 42% of amounts in the portfolio held by French financial institutions are
a "high" dependency score (>60%) on one or
issued by companies that display
more ecosystem services; this number amounts to 9% when considering "very
high" dependency scores
(>80%). The main ecosystem services involved were
water supply (surface and ground) and regulating services, such as erosion
control, flood and storm protection and climate regulation.
To approximate transition risks, the authors measure the biodiversity impact
(or footprint) of companies whose securities are held by French financial
institutions through their direct activities or their upstream value chains. To do
so, they used the MSA.km2 metric. The authors estimate that the terrestrial
biodiversity footprint of the equity and bond portfolio of French financial
institutions at end-2019, cumulated over time, was comparable to the loss of at
least 130,000 km2 of undisturbed ecosystems surface. This corresponds to the
complete artificialisation of 24% of the surface area of metropolitan France. The
annual additional impact on terrestrial biodiversity is equivalent to the loss of
4,800km2 of 'untouched' nature, which corresponds to
14% of the terrestrial area
of the Netherlands. Hence, the indirect impact of the French financial system on
biodiversity is also material, which makes them vulnerable in the event of a
change in the regulations on biodiversity.
A growing body of research is also dedicated to other aspects of nature-related
risks through case studies, such as the work conducted by DNB on water
stress,xii or studies at the Banque de France to focus on transition risks in the
fields of imported deforestation and domestic land use. But obviously, we still
have to progress on macroeconomics and macrofinance of biodiversity.
C. What we have to do as central banks and supervisors
First of all, we must remain humble in the face of the scale of the task. Despite
our determined commitment, nothing will replace government action, be it at the
national, European, or hopefully international level. Europe has already set
ambitious targets in the context of its Green Deal (30% of land and seas turned
into protected areas, 50% reduction in the use of pesticides, etc.), and so has
France. I can only wish for a fruitful outcome for the forthcoming COP15 on
Biodiversity in Montreal.
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However, rest assured that we will do everything in our power and within our
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mandate to manage biodiversity and nature-related risks. Our scope of action
in three "C":
can be summed up
 -
Cooperate through the NGFS. Our common child Banque de France
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and DNB being among the founding fathers will be 5 years old in December.
It has proven incredibly successful in raising awareness, building knowledge
and spreading ideas for action among central banks and supervisors, and I have
great confidence in Ravi Menon's leadership. Beyond climate change, the
NGFS is acting as a great catalyst on nature-related issues. In light of its March
report, the NGFS launched in April a Nature-Related Risks Taskforce co-chaired
by Sylvie Goulard, Deputy Governor of the Banque de France, and Saskia de
Vries from DNB, with the objectives to incorporating nature-related risks into the
NGFS's long standing workstreams
within the next two years. As much as
possible, let us have interim deliverables earlier.

Conceptual framing and research: as a problem well-stated is a
problem half-solved. Bridging methodological shortcomings and data gaps is a
crucial pre-requisite for action, before jumping to any conclusions on the
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prudential or monetary front these must come in due time. Our priority as
central banks and supervisors is thus to build the capacity to further analyse and
study empirical evidence of the financial implications of biodiversity and nature-
related risks. At the Banque de France, we are fully committed to this effort,
thanks to a dedicated team of experts within the Climate Change Centre (CCC)
who contribute both to NGFS and BDF research advances. We will strive to
provide state of the art metrics, financial assessment, and, hopefully in a near
future, scenarios analysis. The work plan of the NGFS Taskforce includes the
development of a unique conceptual framework adapted to our activities, which
will be key to build a common understanding and address the knowledge,
capacity and methodological gaps that we face.

Contribute through individual or national pilot initiatives be it on reporting,
monitoring, or responsible investment. And let me underline here that France is
Article 29 of France's Energy
leading the way, especially on biodiversity issues.
and Climate Law extends climate-related risks reporting requirements for
financial investors to biodiversity-related risks. The French Prudential
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Supervision and Resolution Authority (ACPR part of the Banque de France) is
assessing the compliance of our supervised entities with Article 29 of the
insurance companies we supervise. We received the first reporting last
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September, and not so surprisingly early control checks indicate that
reporting entities are facing challenges in the access to relevant biodiversity-
related data and mostly relied on third party providers. As required by law,
entities that are not able to disclose on all required information will have to
disclose on their plans for continuous improvement.
Since 2020, we at the Banque de France have also been monitoring two
biodiversity-related indicators for the equity components of our own funds and
pension liabilities portfolios: (i) a biodiversity impact score, reflecting
commitments made, measures deployed and actual outcomes of portfolio
companies and (ii) an indicator of our exposure to companies producing
chemicals that are harmful to biodiversity (e.g. pesticides).xiii The performances
of the portfolios' equity components were up in 2021 and described by data
Moody's ESG as "robust"
provider (despite room for improvement on pension
liabilities portfolio), while exposure to companies producing harmful products is
declining, remaining well below the benchmark.
***
To conclude, let me quote one of the most famous Dutch painters, Van Gogh,
writing to his brother Theo from the south of France in 1879: "art is man added
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to nature nature, reality, truth, but with a significance, a conception, a
character, which the artist brings out in it". Just like in Van Gogh's art, it is
France we say "art of life" [art de
becoming urgent that we find a way of life (in
to
vivre]) that allows men to live harmoniously within nature. We have 're-embed'
our economies into nature, also in the name of our long-term economic interest.
It will take time and hard work, as I stressed: this is one more reason to start
soon. Thank you for your attention.
References
i
Rachel Carson (1962), 'A Silent Spring'.
ii
IPBES (2020), Workshop Report on Biodiversity and Pandemics.
iii
Dasgupta, P. (2021), The Economics of Biodiversity: The Dasgupta Review. (London: HM Treasury).
iv
Herweijer, C., Evison, W., Mariam, S., Khatri, A., Albani, M., et al. (2020), Nature Risk Rising: Why the
Crisis Engulfing Nature Matters for Business and the Economy, World Economic Forum.
v
Costanza, R., De Groot, R., Sutton, P., Van der Ploeg, S., Anderson, S. J., Kubiszewski, I., ... & Turner, R. K.
(2014), Changes in the global value of ecosystem services. Global environmental change, 26, 152-158.
vi
NGFS and INSPIRE (2021), Central banking and supervision in the biosphere: An agenda for action on
biodiversity loss, financial risk and system stability. NGFS Occasional Paper.
vii
See NGFS and INSPIRE (2021), Ibid, p13, citing University of Cambridge Institute for Sustainability Leadership
[CISL] (2022), Nature-related financial risk: use case. How soil degradation amplifies the financial vulnerability
of listed companies in the agricultural value chain.
viii
IPCC (2022), Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the
Sixth Assessment Report, Summary for Policymakers
ix
van Toor et al. (2020), Indebted to Nature. De Nederlandsche Bank andPlanbureau voor de Leefomgeving;
x
Calice, P., Diaz Kalan, F., and Miguel, F. (2021), Nature-related financial risks in Brazil. Policy Research Working
Paper 9759, World Bank Group; Martínez-Jaramillo, S. and Montañez-Enríquez, R. (2021), Dependencies and
impact of the Mexican banking sector on ecosystem services. Unpublished NGFS-INSPIRE Study Group Input
Paper; World Bank and Bank Negara Malaysia. (2022). An exploration of nature-related financial risks. Kuala
Lumpur: World Bank.
xi
See Svartzman et al. (2021), Ibid.
xii
DNB (2019), Values at risk ? Sustainability risks and goals in the Dutch financial sector.
xiii
Banque de France (2022), Responsible investment report 2021.