Stockholm (NordSIP) – At a time of interest rate easing and quantitative tightening, the Network for Green of the Financial System (NGFS), an initiative of global central banks keen on tackling climate change, published two reports on nature-related financial risks and litigation. The reports seek to respond to the demands placed upon financial institutions by the Kunming-Montreal Global Biodiversity Framework (GBF) developed by the biodiversity COP15 in 2022.
“By publishing these reports together, we seek to draw attention to the increasing legal risk from nature-related litigation, while the recommendations that the Conceptual Framework offers encourage us to identify and consider specific sources of nature-related risks,” NGFS Chair, Sabine Mauderer, and Chiara Zilioli, Chair of NGFS Experts’ Network on Legal Issues commented on this occasion.
A Guide to Nature-Related Financial Risks
The report on nature-related financial risks provides a conceptual framework to guide the actions of central banks and financial supervisors. The report was developed as a response to the by the NGFS task force on Biodiversity Loss and Nature-related Risks (“Task Force”)
NGFS’s framework follows an integrated approach where climate-related financial risks are strongly interconnected with the broader environmental-related financial risks, and therefore considered within the scope of nature-related financial risks.
The framework begins by discussing the role of “planetary boundaries”, which it describes as the planet’s environmental “safe operating space” beyond which the ecosystem reaches sudden “tipping points” where large-scale abrupt or irreversible environmental changes occur detrimental to the stability of our societies. It goes on to describe the physical and transition risks and how they interact to create nature-related financial risks. These risk stem from the negative effects on economies, individual financial institutions and financial system that result from the degradation of nature and the misalignement of economic actors, their actions and its effect on the environment.
The third chapter of the framework proposes a three-phase assessment of nature-related financial risks. The first phase identifies sources of physical and transition risk that “are potentially material from a microprudential, macroprudential and/or macroeconomic risk perspective”. The second phase assesses economic risks, including the risks to value chains, how these risks affect micro-macro interactions, and the vulnerability of economic actors, how adaptable they are and what technological or geographical substitution possibilities are available that could mitigate the effects of shocks and risks. Phase 3 discusses how risk to, from and within the financial system can be assessed, including considerations about the spreading of nature-related shocks to the rest of the economy.
The last chapter of the framework concludes with a brief discussion of pathways to action and is followed by two illustrative cases focused on the Amazon rainforest and the Colorado river basin.
A Guide to Nature-Related Litigation
Litigation risk is a subset of both physical and transition risks, thus motivating the publication of the second report in tandem with the aforementioned framework. The report on nature-related litigation outlines the key emerging trends related to nature-related litigation, including cases concerning biodiversity loss, deforestation, ocean degradation, carbon sinks and plastic pollution, and explores their potential impacts for central banks, supervisors and the financial system.
The report discusses examples nature-related litigation against states and public entities and against companies and financial institutions. Litigation against public entities have tended to involve two types of cases: rights-based nature cases, rights-based cases focused on the climate-nature nexus. On the other hand, the report categories litigation against private entities as being facilitated by one of four pieces of legislation: corporate due diligence laws, tort law, shareholder rights and anti-money laundering laws.
The report also identifies a number of developments that may facilitate a feedback loop where legislation can offer new grounds for future litigation; while litigation may fill gaps where legislation is not in place or is weakly enforced and may act as a driver for new legislation.
Last but not least, the report discusses three potential impacts of nature-related litigation risk on financial institutions. Beyond reputation risks, direct risks involve payout, increased legal and administrative costs, rising insurance costs and decreases in stock process. Indirect costs invove the impact of litigation against clients and counterparties and against relevant state parties and public entities. Parallel
Only the Beginning
The publication of the final Conceptual Framework and the litigation report is only the beginning, according to NGFS. “It marks the starting point of a continuous process to develop knowledge and experience in this field, being mindful of the fact that failing to act due to imperfect knowledge would almost certainly result in a ‘too little, too late’ scenario.”
