SPEECH
Natura finis magistra - acknowledging
naturerelated risks to make finance thrive
Keynote speech by Frank Elderson, Member of the Executive Board
of the ECB and Vice-Chair of the Supervisory Board of the ECB, at
De Nederlandsche Bank/Official Monetary and Financial Institutions
Forum conference on "Moving beyond climate: integrating
biodiversity into financial markets" at Artis Zoo in Amsterdam
Amsterdam, 29 September 2022
The translation of the full Latin name of Artis Zoo, founded back in 1838 as "Natura Artis Magistra", is
"Nature is the teacher of the arts". Today, nature has something to say to all of us: it is hurting. And we
are responsible for that hurt. Human activities are behind the decline in natural capital, the reduced
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capacity to provide ecosystem services and the loss of biodiversity.[ What's more, we are putting at
risk more than half of global GDP. Around €40 trillion of global income relies on nature.
This means that nature-related risks, including those associated with biodiversity loss, could have
significant macroeconomic implications. Failure to account for, mitigate and adapt to these implications
is a source of risk for individual financial institutions and for financial stability. In a nutshell, this forms
part of our mandate, as acknowledged by the NGFS in its statement on nature-related risks released
in March 2022. The final report by the NGFS/INSPIRE joint Study Group referred to in this statement
carefully explains how environmental degradation will expose financial institutions to physical and
transition risks in a way that is very similar to climate change.
In spite of this, we have to admit that central banks, supervisors, regulators and international standard
setting bodies have so far made less progress in integrating environmental risks than climate-related
risks. Although the analytical framework for climate-related risks is largely applicable to environmental
risks, the latter come with their own unique features and challenges. For example, biodiversity does
not have an unequivocal metric like carbon dioxide equivalents, which figure prominently in climate
discussions. We therefore need to look at many more metrics, such as nitrogen, phosphorus and
carbon dioxide. Let me emphasise "look at more", not "look away".
Since we have explicitly recognised the materiality of nature-related financial risks, it is no longer a
matter of principle that the work on environmental risks is less advanced than the work on climate. It is
a matter of putting it into practice. And it is clear that we can no longer drag out feet with
putting-it-intopractice. Here an important contribution will be made by the new NGFS task force on nature-related
risks that will be led by Saskia de Vries from De Nederlandsche Bank and Sylvie Goulard from the
Banque de France. Both representatives from institutions that have done pioneering work on
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naturerelated risks.[
At the ECB the work on environmental risks is already starting to take shape in our banking
supervision. In 2020 we published our guide on our supervisory expectations for the risk management
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of C&E risks.[ Indeed, C-and-E: climate-related and environmental risks. In this guide, we explicitly
recognised that environmental factors related to the loss of ecosystem services, such as water stress,
biodiversity loss and resource scarcity have also been shown to drive financial risk. We therefore
expect banks to evaluate all environmental risk-related information beyond just climate risks to ensure
that their risk management is all encompassing.
When we asked banks last year to evaluate their own risk management practices in relation to our
expectations, we found that some of them had already started to identify and manage risks beyond
those that are just climate-related. However, very few banks back then had actually begun to
implement these practices and we made them aware of this gap with regards to our supervisory
expectations.
As part of this year's thematic review on climate-related and environmental risks, we followed up on
these points, focusing on banks' assessments of the materiality of environmental risks and on their risk
management frameworks. Our preliminary results show that many banks have by now made an initial
assessment of their environmental risk exposures. We also see that banks are using the "climate risk
playbook" to develop their approach to environmental risk. They map out physical and transition risk
drivers and typically start by excluding some activities to avoid financing those that have an excessive
environmental impact. Banks also integrate these risks into their due diligence processes to collect
information and gain a better understanding of how their clients might be affected. Besides these
qualitative approaches, several institutions are leading the way in quantifying the risks and impacts
through the use of biodiversity footprinting exercises and the development of approaches for
biodiversity scores.
We welcome this progress and will use the opportunity to share the best practices we have identified
when we will soon publish the results of the thematic review. At the same time, we will reiterate that all
banks must ultimately comply with all of our supervisory expectations on C&E risks by the end of 2024
at the latest.
With respect to our monetary policy, the ECB is currently fully on track implementing the climate action
plan that we committed to when we introduced our new monetary policy strategy in the summer of last
year. To give you a concrete example, last week we announced the details of how we intend to
gradually decarbonise our corporate bond holdings, starting on next Monday, in line with the goals of
the Paris Agreement. At the same time, it is important to remember that our climate action plan is not
an aim in itself but rather a means for us to deliver on our mandate. That's why the Governing Council
announced in July that it would regularly review the measures proposed in its action plan to assess
whether they are still fit for purpose, and continue to support the decarbonisation path towards
reaching the goals under the Paris Agreement, as well as the EU climate neutrality objectives. And not
only this. Something that is clearly relevant for us and this conference is that we will adapt these
measures if necessary to address other environmental risks within our mandate.
Expressing a readiness to look beyond climate-related risks and address environmental risks is an
important initial step that I invite all relevant stakeholders to take. That applies to central banks,
supervisors, regulators and international standard setting bodies. Even if the current focus of the
ongoing work is still on climate-related risks, our ever-evolving understanding of the materiality of
environmental risks and their transmission channels implies that these risks ultimately need to be
taken into consideration in everything we do.
Let me conclude.
For the first time in 75 years the Artis Groote Museum - where this conference is held - reopened its
doors this spring. The theme of the museum is that everything is connected: plants, animals, microbes
and human beings, all in a precious but delicate harmony. Economics and finance are no different.
Taken together, households, firms, governments and financial institutions form a similarly precious -
and at times delicate - equilibrium. Our analysis, assessment and policy actions should reflect the fact
that nature and the economy are equally interconnected and interdependent. In line with a central
theme of the landmark Dasgupta Review on the economics of biodiversity that "humanity is embedded
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in nature".[
Back to "Natura artis magistra". Nature isn't just the teacher of the arts, it is also the teacher of finance.
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One may be inclined to paraphrase: "natura finis magistra".[ In fact, nature makes finance thrive. This
is what ultimately needs to become fully embedded in the work of central banks, supervisors,
regulators and international standard setting bodies, within their mandate. Because nature-related
risks are part of our mandate.
Thank you for your attention.
1.
University of Cambridge Institute for Sustainability Leadership (2021), Handbook for nature-related
financial risks: key concepts and a framework for identification , March.
2.
De Nederlandsche Bank (2020), Indebted to nature: Exploring biodiversity risks for the Dutch financial
sector , June; De Nederlandsche Bank (2019), Values at risk? Sustainability risks and goals in the
Dutch financial sector ; and Banque de France (2021), " A silent spring for the financial system?
Exploring biodiversity - Related financial risks in France ", Working Paper Series, No 826, August.
3.
ECB (2020), Guide on climate-related and environmental risks - Supervisory expectations relating to
risk management and disclosure , November.
4.
Dasgupta, P. (2021), The Economics of Biodiversity: The Dasgupta Review , HM Treasury, London,
February.
5.
The word "finance" originates from the Latin "finis" meaning "limit" or "end" and was first used in its
current context in French in the sense of settling debt.