Dutch central bank builds scenarios to assess impact of biodiversity loss on financial sector

Move comes as NGFS nature taskforce set to create a conceptual framework for members to take nature-related financial risks into account.

The Dutch central bank is exploring the implications of biodiversity loss for financial stability “using a scenario approach”, Saskia de Vries, head of international financial stability, has told Responsible Investor.

The work will build upon a previous study conducted by De Nederlandsche Bank in 2020. Indebted to Nature examined 1.4 trillion of investments in the Dutch financial sector and found that 36 percent – 510 billion – are highly dependent on one or more ecosystem services.

“For these investments, the loss of ecosystem services would lead to substantial disruption of business process and financial losses,” the report said.

It marked the first time a central bank had attempted to quantify the risk that biodiversity loss poses to a national financial sector.   

The latest biodiversity assessment is again being done in collaboration with the Planbureau voor de Leefomgeving (the Dutch environmental agency). As the work is in its early stages, de Vries was unable to provide further details.

Responding to the news, Jessica Smith, nature lead for The UN Environment Programme Finance Initiative, told RI: “UNEP FI is running a comprehensive [Taskforce on Nature-related Financial Disclosures] piloting programme spanning six themes with 40 financial institutions from five continents. Within this process, we are actively looking at how to build on our long-established [Task Force on Climate-related Financial Disclosures] work on climate scenarios and scenario analysis methodologies to integrate biodiversity and natural capital issues.

“This integration presents a number of substantial technical challenges, but is essential to making nature-related risk assessments as meaningful as possible for financial actors, as scenario analysis can be a useful tool to identify potential future outcomes for the associated ecosystem services linked to the business.” 

De Vries is also co-chair of a nature taskforce created by the Central Banks’ and Supervisors’ Network for Greening the Financial System (NGFS). Launched in March, it has a two-year mandate to mainstream the consideration of nature-related risks across the initiative’s various streams of work.

Speaking at the Oxford Sustainable Finance Summit, held at the end of July, de Vries provided further details on the intended outputs of the taskforce. She explained that it will – among other things – create a conceptual framework for members to take nature-related financial risks into account.

Asked about the likely actions this could prompt from supervisors and central banks after the two-year process, de Vries flagged stress testing.

“What has been important in terms of the assessment of climate-related risks is stress testing, so I would imagine that we make some progress there,” she said. “We’ll be moving from climate-related stress tests only to nature-related stress tests as well.”

She added: “Within the NGFS we have a scenarios workstream, where we offer climate scenarios that people anywhere can use. I would hope that this would be expanded with nature scenarios or integrated nature climate scenarios.”