News | Nov 2020
This article was co-authored with the Natural Capital Finance Alliance
The Dutch Central Bank and financial supervisor, De Nederlandsche Bank (DNB), is the first central bank to highlight biodiversity as a material financial risk.
In June, De Nederlandsche Bank (DNB) released a landmark study, ‘Indebted to nature’, which found that Dutch financial institutions alone have EUR 510 billion of exposure to biodiversity risks, like disruption of animal pollination. The assets at risk represent as much as 36 percent of the assets the central bank assessed across Dutch banks, pension funds and insurers.
On top of physical risks linked to the loss of nature, DNB found that Dutch financial institutions are also exposed to reputational risks and transition risks, the latter arising from stricter policy around biodiversity protection or a shift in consumer preferences away from products and services that have a negative impact on nature.
While their latest report cemented DNB’s position as a leading central bank globally on nature, this was not their first foray into the topic. In 2019, DNB put out the report ‘Values at risk?’, which set out a qualitative description of biodiversity risks.
The Netherlands Environmental Assessment Agency (PBL) was the one to encourage the central bank to take the next step and quantify these risks. They approached DNB and proposed a collaboration. “We didn’t know that much about biodiversity and they didn’t know that much about the financial sector, so it was a unique, first-time cooperation,” explained Joris van Toor, Policy Advisor at DNB and author of the collaborative report, at a webinar in June. For their pioneering report, DNB took on the financial data and analysis, while the Environmental Assessment Agency contributed the nature-related data.
The ENCORE tool - developed by the Natural Capital Finance Alliance, a joint initiative by UNEP FI and Global Canopy, in cooperation with UNEP-WCMC - was foundational to the central bank’s assessment of financial biodiversity risk.
DNB and PBL used ENCORE to identify how 86 different business processes are dependent on 21 different ecosystem services. To assess the importance of the contribution an ecosystem service makes to a business process, they used the materiality ratings within ENCORE. The level of dependency includes two aspects: the loss of functionality in the business process if the ecosystem service is disrupted, and the resulting financial loss.
They then linked the business processes with high or very high levels of biodiversity dependency to economic sectors, before calculating the exposure of Dutch financial institutions to each of those sectors.
Having concluded that biodiversity risks are material for over a third of the assets in the Dutch finance sector, DNB is now urging individual financial institutions to urgently assess their own biodiversity-related risks, calling it a question of sound financial risk management. On the regulatory side, DNB is recommending that supervisory authorities ensure that financial institutions report on their biodiversity risks and resilience.
Finally, the central bank recommends finance sector players collaborate to develop consistent and broadly applied standards for measuring and reporting on biodiversity risks and impacts. The initiative to bring together a Task Force on Nature-related Financial Disclosures (TNFD) is now aiming to do exactly that. An Informal Working Group, consisting of 62 members, including 34 financial institutions, launched in September, with the Task Force itself expected to launch next year.
In addition to developing recommendations for the finance sector, DNB is using their convening power to spur action.
In 2016, the central bank set up the Sustainable Finance Platform, a collaboration with a wide range of institutions, including the Dutch Banking Association, the Federation of the Dutch Pension Funds and the Ministry of Finance. A Working Group on Biodiversity, consisting primarily of private sector players, has been set up under the umbrella of this platform. Mid-October, the Working Group released guidelines on deforestation risk mitigation for financial institutions, following the launch earlier this summer of another report, Biodiversity: Opportunities & Risks for the Financial Sector.
DNB’s Executive Director, Frank Elderson, also chairs the Central Banks and Supervisors Network of Greening the Financial System (NGFS). Through this network of 72 members, DNB has tested interest with other central banks to take action on biodiversity. “A lot of central banks are very busy with climate. However, we are hopeful, since the awareness for biodiversity is growing,” DNB’s Joris van Toor explained. He highlighted that expanding the data and knowledge base around biodiversity risks is a critical first step.
The increasing number of finance-related biodiversity initiatives, including the initiative to bring together a TNFD, the Finance for Biodiversity pledge and the continuing development of ENCORE over the coming years holds promise that the data and knowledge base will now build rapidly within the financial sector, across both public and private institutions. The question is when central banks will act for nature, not whether they will do so.