Central banks, regulators and supervisors urged to intervene in main drivers of nature loss and climate change alongside governments

Zurich, July 17, 2024  
A new Guide, published today by WWF´s Greening Financial Regulation Initiative, sheds light on how the financial sector contributes to deforestation and conversion of other ecosystems than forests, calling on central banks, financial regulators and supervisors to put in place adequate monetary, regulatory and supervisory measures to address the deriving financial risks and impacts.
 
One of the most important drivers of climate change and nature loss is land use change from which 48% consists in deforestation and conversion of other ecosystems.  Deforestation and conversion are the source of physical and transition risks that affect the financial system, and can lead to the collapse of the entire financial system.
 
Still, finance keeps flowing towards the main driver of deforestation: agricultural expansion.  According to Global Canopy, as of October 2022, 150 financial institutions provided $6.1 trillion USD to 350 companies exposed to deforestation risk.
Financial institutions responsible for allocating resources to deforestation risk sectors do not fully recognize deforestation and conversion as a source of risk. This is reflected in the overall lack of efforts to eliminate commodity-driven deforestation.
 
Central banks, financial regulators and supervisors need to play their part in addressing deforestation and conversion, a fundamental requisite for tackling the global problem of climate change and nature loss related risks.
 
Pablo Pacheco, Lead Scientist, WWF Forest Practice, said: “The global economy is dependent on nature and therefore exposed to the financial risk of short and long term nature loss. This is why central banks, supervisory and regulatory authorities should internalise the associated risks of nature loss in monetary policies and operations.”
 
Maud Abdelli, WWF’s Greening Financial Regulation Initiative Lead, said: “Central banks, financial regulators and supervisors are not meant to replace any governmental action but they should collaborate with policy makers and play their part. The less the financial system is prepared to adapt to regulations and preferences that aim to halt deforestation and conversion, the more difficult it becomes to prevent its instability.”
 
In order to significantly reduce the risks posed by climate change and nature loss on the financial market and secure long term financial stability, WWF urges central banking, regulation and supervision authorities to:
 

• Tackle the drivers of nature loss and climate change as part of their mandates to ensure and maintain financial market and price stability.
• Take measures that directly address the financial flows going to economic activities responsible for deforestation and conversion, and ensure that financial portfolios do not contribute to activities that are worsening climate change and nature loss.
• Assess deforestation and conversion in monetary and non-monetary policy portfolios to mitigate the financial risks linked to deforestation and conversion

 
Maud Abdelli, WWF’s Greening Financial Regulation Initiative Lead, said: “Tools to understand the exposure of deforestation and conversion are available. The integration of deforestation and conversion in financial regulation and monetary policy can help modulate financial flows towards environmentally harmful activities, mitigate future financial risks and ensure a resilient financial system."