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Developing a supervisory framework for financial risks stemming from biodiversity-related losses

Supporting reforms to develop well-regulated, stable and competitive financial markets

Funding Programme
Year
  • 2022

Developing a supervisory framework for financial risks stemming from biodiversity-related losses 

The Commission supported the Hungarian central bank (MNB) in the development of a supervisory framework, to enable MNB and other central banks assess biodiversity-related financial risks in the financial system, including transmission channels for physical and transition risks.

Context

The nature, encompassing living organisms, their diversity, and the interactions they have with each other and their non-living environment, plays a crucial role in human well-being and economic activities by providing a variety of ecosystem services. However, biodiversity is currently declining at an alarming rate, with natural ecosystems shrinking by nearly 50% compared to their original estimates. This loss of nature poses risks to economic activities through both physical and transition risk channels. Consequently, financial assets tied to these economic activities, along with the institutions holding them, may face financial risks, potentially threatening financial stability.

Support delivered

As part of the first phase, the project developed a methodological framework designed to translate biodiversity risks to financial risks, drawing on a mapping of existing tools, practices, definitions, transmission channels, metrics and indicators. This conceptual framework is relevant across country contexts for supervisors and retail banks.

During the second phase, the above -mentioned framework was implemented in the context of the Hungarian financial sector, in co-operation with the MNB and a commercial bank with retail activities in Hungary. The project also involved communicating key findings to banks, the MNB, other EU supervisors and broader OECD policy community.

Results achieved

The project helped MNB and banks with retail activities in Hungary become more informed about their exposures, impacts and dependencies to biodiversity-related financial risks, to improve management of such risks. Outreach on the methodological framework and key results of the project improved the knowledge of other key stakeholders, including financial regulators and supervisors in other countries.

Useful links

https://zoldpenzugyek.mnb.hu/research-collaborations/the-joint-biodiversity-project-of-mnb-and-oecd-with-the-support-of-the-european-commission

https://www.oecd.org/en/about/projects/biodiversity-related-risks-to-the-financial-sector.html

More about the project

You can read the documents related to the project here: