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Ma Jun: Re-shaping the financial regulatory framework with biodiversity-related risks



As China proposed the “dual carbon” goals, the impact of climate change on the economy and finance has gained increasing attention. Meanwhile, central banks, regulatory agencies, and financial institutions in many countries have gradually realized that biodiversity can also have significant impact on the macro-economy and financial system.

The Central Banking and Supervision in the Biosphere: An Agenda for Action on Biodiversity Loss, Financial Risk and System Stability (the Report) focusing on this topic was released on March 24, 2022. It was jointly written by a special study group established by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the International Network for Sustainable Financial Policy Insights, Research, and Exchange (INSPIRE). More than 100 experts from over 50 central banks, financial regulatory agencies, and academic institutes across the world engaged in the Report.

Financial Times had an inclusive interview with Ma Jun, Co-chair of NGFS-INSPIRE special study group, Chairman of the Green Finance Committee (GFC), China Society for Finance and Banking, and President of the Institute of Finance and Sustainability (IFS), to provide better understanding of the relations between biodiversity and financial stability. 

FT: Why is it urgent for the financial industry to pay attention to biodiversity?

Ma Jun: Biodiversity loss, like climate change, is one of the most pressing challenges of this century. Over the past 50 years, human activities such as land use, deforestation, and wildlife trafficking have exacerbated the vulnerability of ecosystems. The Living Planet Index (LPI) shows an average decline of 68% in global species populations since 1970. If this trend continues, it will endanger the integrity of ecosystems and human benefits from it, and even result in a global economic crisis. It should be noted that the impact of biodiversity loss on economy is non-linear, and can suddenly escalate once crossing a certain tipping point. Thus, the financial industry is obliged to protect biodiversity, while regulatory authorities should introduce corresponding incentives and constraints.

Compared to climate change risks, the financial industry’s comprehension of the impact of biodiversity and its reliance on natural capital remains inadequate. Nonetheless, the output of the joint research group and numerous other professional studies is expected to increase the awareness of central banks and regulatory authorities regarding issues derived from biodiversity, particularly the related financial risks.

FT: What kind of financial risks will biodiversity loss lead to? How does this happen specifically?

Ma Jun: Ecosystems is essential for human survival and development. It provides services on provisions such as food, water and air, on regulating natural process and supporting cultural activities. According to the World Bank and other institutions estimate, around half of the global gross domestic product (GDP) is directly dependent on services provided by biodiversity and ecosystems, particularly in industries such as agriculture, forestry, fishery, pharmaceuticals, tourism, as well as transportation, retailing, and service industries closely related to tourism. Biodiversity loss will lead to a contraction of these industries and investment therein.

The financial industry mainly faces two types of biodiversity-related risks, that is physical risks and transition risks.

Physical risks refer to risks caused by economic activities and financial assets which are reliant on ecosystems and biodiversity and are therefore vulnerable to ecological degradation and biodiversity loss. For example, biodiversity loss will affect industries, businesses, and economic activities reliant on biodiversity, leading to financial risks such as corporate losses, bankruptcies, financial asset depreciation, and even total loss.

Transition risks arise from human intervention aimed at avoiding and mitigating the impact of economic activities on ecosystems and biodiversity. For example, government-introduced biodiversity protection policies (such as the expansion of natural reserves, the prohibition of economic activities that endanger biodiversity, or the imposition of taxes and fines on such activities) may pose risks such as hindrances to business operations, corporate bankruptcies or defaults.

Compared to climate change, assessing risks associated with biodiversity loss is much more challenging. Climate change is mainly determined by one single factor, namely greenhouse gas (GHG) emissions, while biodiversity loss and other development processes related to natural systems are influenced by multiple complex factors, some of which present non-linear and irreversible trends. Therefore, although there have been some practices, methodological challenges still persist in assessing the financial risks associated with biodiversity, and a number of problems regarding modelling methods, indicators, and data are to be addressed in the future.

FT: What is the size of funding demand for biodiversity? Are there any positive attempts in China? What are the main challenges?

Ma Jun: The Secretariat of the Convention on Biological Diversity (CBD) estimates, the current annual financial flows into global biodiversity conservation is about $143 billion, with the gap of $711 billion by 2030. Most biodiversity funds come from world governments, but to bridge the huge gap, greater participation of social capital especially from private sector is required. Additionally, a corresponding financial system must be established to better support biodiversity conservation and nature-positive economic activities.

In 2021, 36 Chinese financial institutions and 24 foreign banks and international organizations jointly issued the Joint Declaration of Banking Financial Institutions Supporting Biodiversity Conservation at the first segment of the Fifteenth Meeting of the Conference of the Parties (COP15), demonstrating the willingness of Chinese financial institutions to strengthen biodiversity conservation.

China’ green finance standards and catalogs outline a range of activities to promote biodiversity protection, including reforestation of reclaimed farmland, conservation of national parks and World Heritage Sites, ecological restoration and governance, and supporting for sustainable agriculture, forestry, and fishery resource conservation. These are important measures to provide financial support for biodiversity conservation.

In recent years, Chinese financial institutions have launched some innovative products such as forest tenure mortgage loans, forestry carbon sink pledge loans, national park charging right mortgage loans, blue bonds, and wildlife liability insurance. These products represent useful attempts to protect biodiversity. In the future, China should also consider establishing various funds to support biodiversity and mobilize social capital into biodiversity conservation projects.

FT: What international experiences can be drawn upon to provide financial support for biodiversity conservation?

Ma Jun: Currently, some international financial institutions have established comprehensive environmental and social risk safeguard policies or adopted the Equator Principles. Measures are undertaken to avoid and mitigate negative impacts on biodiversity, from screening to implementation and supervision. Some institutions are attempting to develop methodologies and tools for assessing the footprint and the impact of their investment activities or  portfolios on biodiversity. They are also conducting biodiversity-related stress testing.

In terms of information disclosure, the Taskforce for Nature-related Financial Disclosures (TNFD) released a test framework this month and will publish the final version in 2023 to help enterprises and financial institutions have a comprehensive understanding of natural-related risks and make more rational decisions.

Regarding the promotion of biodiversity investment and financing, some international financial institutions are coming up with innovative financial instruments and products for projects aimed at ecological protection and restoration, such as sustainable forestry, agriculture, and fisheries. For instance, blue bonds have been used to support marine conservation, and loans are linked to the effectiveness of ecological restoration and conservation.

FT: According to INSPIRE research, what measures can financial regulatory agencies take to encourage financial institutions to strengthen their support for biodiversity conservation?

Ma Jun: Central banks and regulatory agencies should facilitate to build a biodiversity-related risk assessment and prevention mechanism from the following four aspects. First, establish an analytical framework for the interaction of the real economy, the financial system and biodiversity, to assess the dependence of major economic activities and financial assets on biodiversity and the impact of biodiversity loss on economic and financial stability.

Second, assess the risk exposure of the financial system and financial institutions caused by biodiversity loss, e.g. the estimation of the proportion of bank assets that heavily depend on or affect biodiversity.

Third, guide financial institutions to conduct stress testing on biodiversity-related risks and perform scenario analysis, e.g. analyzing the impact of biodiversity loss and government policies aimed at biodiversity conservation (e.g. the expansion of natural reserves, and the implementation of penalties, fines, or taxes for businesses causing biodiversity loss) on corporate financial conditions, as well as the resulting financial risks.

Fourth, gradually establish a regulatory framework for financial institutions to manage biodiversity-related risks, including assessing the impact of investment activities on biodiversity, evaluating the risk exposure caused by biodiversity loss, conducting scenario analysis and stress testing, disclosing information about these risks, and establishing strategic objectives, governance mechanisms, risk monitoring, and reporting systems for managing these risks.


FT: What are the focus areas for the NGFS newly-established special working group on biodiversity risks (natural ecological risks)?

Ma Jun: The working group will further promote the NGFS’s work on addressing nature-related risks and create a set of work plans to incorporate biodiversity physical risks and transition risks into financial regulatory frameworks, the evaluation of various scenarios, and the monetary policy and regulatory activities of central banks.

Source: Financial Times (Author: Ma Meiruo; Editor: Wang Tianyu and Li Liujia)