ECB’s Elderson: Nature-related risks ‘are part of our mandate’

Banque de France governor Galhau echoes calls for central banks to collaborate on biodiversity and nature loss.

François Villeroy de Galhau, governor of the Banque de France, and Frank Elderson, a member of the executive board of the ECB, have called on central banks – and other market players – to act address biodiversity.

The pair were speaking at a conference in Amsterdam entitled “Moving beyond climate: integrating biodiversity into financial markets”, hosted by De Nederlandsche Bank and the Official Monetary and Financial Institutions Forum (OMFIF).

In his keynote speech, Elderson said that – despite it being clear that the financial system is clearly exposed to biodiversity loss – central banks, supervisors, regulators and international standard-setting bodies have so far made less progress in integrating environmental risks than climate-related risks.

“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,” he said. “It is a matter of putting it into practice. And it is clear that we can no longer drag out feet with putting it into practice… Nature-related risks are part of our mandate.”

Echoing Elderson’s remarks, de Galhau also warned of the dangers of ignoring biodiversity and nature-related risks. He called on central banks to collaborate through the NGFS, to work on conceptual framing and research and to contribute through individual or national pilot initiatives in areas such as reporting, monitoring and responsible investment.

As an example of national initiatives, he pointed to Article 29 of France’s Energy and Climate Law, which extended climate-related risk reporting requirements for financial investors to biodiversity-related risks.

He said: “The French Prudential 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 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.”

De Galhau stressed, however, that there are limits to the role that can be played by central banks in addressing biodiversity loss.

“Despite our determined commitment, nothing will replace government action, be it at the national, European, or hopefully international level,” he said. “Europe has already set ambitious targets in the context of its Green Deal (30 percent of land and seas turned into protected areas, 50 percent 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.”

Both market leaders praised the NGFS’s ongoing taskforce on nature-related risks, led by Saskia de Vries from De Nederlandsche Bank and Sylvie Goulard from the Banque de France.

ECB expectations

Returning to the ECB, Elderson provided further insight into the preliminary results of the bank’s 2022 thematic review.

The stocktake comes two years after the ECB published initial guidance on its supervisory expectations for the management of climate and environmental risk.

In 2021, the ECB first asked banks to evaluate their risk management practices in relation to these expectations. At that point, while some had started to identify risks beyond climate, few had adapted their practices in line with the ECB’s guidance.

Earlier in summer, Elderson gave some insights into the preliminary findings of the upcoming review for 2022. He indicated that most banks had started to adapt their practices in line with ECB expectations, despite gaps on how they account for physical climate risks and exposure to clients that are misaligned with the Paris Agreement.

At the Amsterdam event on Thursday, he noted this year’s review also showed that banks in the eurozone area “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,” he said. “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.”

Elderson added that, 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,” he said. “At the same time, we will reiterate that all banks must ultimately comply with all of our supervisory expectations on climate and environmental risks by the end of 2024 at the latest.”

During a panel discussion at the same event, Nick Robins said the Grantham Research Institute – where he is professor in practice for sustainable finance – was about to start a research project looking at how central banks and their portfolios can take account of climate risk and align portfolios with net zero. While the project is focused on climate, he added that “we will be thinking of nature”.