Available online at www.sciencedirect.

com

Climate change and biodiversity loss: new territories for

financial authorities
Hugues Chenet 1,2,3 ]]
]]]]]]
]]

Climate change became a central issue in 1988 with the The main point of view was reputational, trying to avoid
creation of the Intergovernmental Panel on Climate Change. or manage either the local impact of financed projects on
Financial authorities only started to take up the subject in 2015. surrounding communities and nature or the broader
Since then, they have continuously accelerated their endeavour controversial activities of invested or client firms. Then
in this regard and have quickly added biodiversity loss to the came a major turning point around COP21 and the Paris
environmental issues to deal with. Unfortunately, despite the Agreement in 2015, when finance and capital markets
very fast learning curve they follow, financial authorities have became a core issue of the climate change discussion, a
taken a path that may not succeed. But moving beyond first since the creation of the Intergovernmental Panel
approaches solely based on a financial risk paradigm and on Climate Change (IPCC) in 1988 and the adoption of
fostering transdisciplinary research to address broad systemic the UN Framework Convention on Climate Change
questions at the interface of the natural and socioeconomic (UNFCCC) in 1992.2 Finally, in the last few years, an
worlds, central banks and supervisory authorities could enter a additional major theme has newly emerged for finance
new era, where the impact of their decisions would contribute stakeholders and broadened their environmental per-
materially to solve the challenges of our time. spective: the collapse of biodiversity.

Addresses In this article, we propose to step back and analyse the

1
IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - current and possible ways forward in this consideration
Lille Economie Management, F- 59000 Lille, France
2 of climate and biodiversity by finance, from the specific
Institute for Sustainable Resources, University College London, UK
3
Chair Energy and Prosperity, Fondation du Risque, France perspective of financial authorities,3 in articulation with
academic research. We adopt a dual frame, highlighting
Corresponding author: Chenet, Hugues ([email protected]) the extent to which they may either contribute to and/or
suffer from those environmental changes.
Current Opinion in Environmental Sustainability 2024, 68:101449
While the subject is blooming, it does not yet benefit
This review comes from a themed issue on Climate Finance, Risks
and Accounting
from great depth or hindsight in the corpus of academic
literature. This is particularly true for the subject of
Edited by Rosella Carè, Othmar Lehner and Olaf Weber
biodiversity, which hardly existed for financial autho-
For complete overview of the section, please refer to the article rities 2–3 years ago.4 Lying at the crossroads of funda-
collection, “Climate Finance, Risks and Accounting” mental sciences, social sciences, and the governance of
Available online 9 April 2024 public policy, this research topic is fundamentally
Received: 15 September 2023; Revised: 23 February 2024; transdisciplinary. This poses challenges for academic
Accepted: 12 March 2024 research, on which we conclude.
https://doi.org/10.1016/j.cosust.2024.101449
1877–3435/© 2024 The Author. Published by Elsevier B.V. This is an
Why should there be an interaction between
open access article under the CC BY license (http:// finance, climate, and biodiversity?
creativecommons.org/licenses/by/4.0/). Besides making payments, managing personal finances,
transforming the maturity of financial flows, and hand-
ling risk, the main role of finance at macroscale is cer-
tainly to allocate capital to the real economy [1]. From

Introduction
2
Finance began to take an interest in the natural en- The IPCC and the UNFCCC are respectively the science and
vironment1 relatively recently. In the early 2000s, this diplomacy institutional legs created to address climate change.
3
The financial authorities we address in this paper are central banks
interest was focused on some specific financial activities,
and financial supervisors, which can be considered delegated autho-
such as project finance or socially responsible investing. rities, by opposition to political authorities [18•].
4
The publications we refer to come from different types of sources:
peer-reviewed academic literature, documents from central banks and
other financial authorities, and publications from international in-
1
In this paper, the use of ‘environment’ is for ‘natural environment’. stitutions.

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2 Climate Finance, Risks and Accounting

that perspective, a task for finance in the ecological change has been tremendous, and literally opened a new
transition is to allocate funds towards economic activities chapter of the finance and climate story [9].
contributing to sustainability goals [2].5 But this positive
contributory role of finance — how can finance be useful This concentration on disclosure of financial risk char-
for ecology [3] — must not conceal its downside related acterises the importance of financial supervisors in this
to the negative ecological impact of finance [4]. Indeed, process, aside the monetary policy role of central banks.
as much as finance can be seen as part of the solution, in The creation of the Network of Central Banks and
allocating funds towards desirable and sustainable eco- Financial Supervisors for Greening the Financial System
nomic activities, it is also part of the problem, for having (NGFS) in 2017 substantiates this. It is interesting to
allocated and still allocating funds towards undesirable note that the ‘greening’ part (‘contribution to the solu-
and detrimental economic activities (e.g. fossil fuels and tions’ in Figure 1), relevant to the role of ‘financ[ing] the
deforestation) [5,6]. transition efficiently’ mentioned by Carney and high-
lighted by the NGFS both in its own name (‘greening the
While the narrative and new perspectives on such po- financial system’) and founding statutes as a primary goal
tential role(s) of finance in relation to environmental (cf. below, bold letters), actually soon became veiled
sustainability have clearly emerged and grown recently, behind the emphasis on financial risk [12].
the more traditional paradigm, based on financial risk
and return as the main (if not sole) capital allocation key, “The Network will help to strengthen the global
still dominates [7–9], despite the coexistence of alter- response required to meet the goals of the Paris
native approaches [10].6 This connection between en- agreement and to enhance the role of the financial
vironment and finance is now usually framed through system to manage risks and to mobilize capital for
(bio)physical and transition factors of financial risk, il- green and low-carbon investments in the broader
lustrating a chain of impact from the environment to fi- context of environmentally sustainable develop-
nance (Figure 1). Figure 1 represents this together with ment.” [emphasis added] [13]
the other impact chain described above, from finance to
the environment. The underlying logic behind climate-related financial
risk (CRFR) computation as the pivot of financial au-
thorities’ way to the climate emergency can be explained
Why do financial authorities care? by the primary importance of mathematical model-based
The traditional focus on financial risk mentioned above risk management in their paradigmatic approach to fi-
has been reinforced with the implication of financial nancial stability [14•–17]. This is particularly true in
authorities, triggered by the pivotal speech ‘Breaking the high-income countries where the financial risk focus
Tragedy of the Horizon’ by Mark Carney, former Governor rests on the independence of central banks from political
of the Bank of England and Chairman of the Financial authorities, thereby defining a relatively narrow tech-
Stability Board, ahead of the COP21 [9,11]. nical mandate (objectified by financial risk) to avoid
friction with elected governments and policymakers
Carney’s 2015 speech is influential in that it clearly sets (‘subjectivated’ by ethics, general and/or individual in-
out the two different aspects that will thereafter frame terest). Such mandates are generally limited to price and
how financial authorities would justify their role in financial stability,7 while other jurisdictions’ central
combating climate change: systemic financial risk and banks (in particular in developing economies) may have
transition financing. As such, it implicitly eludes the explicit economic development goals, which can include
other notion: the negative contribution related to finan- climate and environmental objectives [18•,19•]. Conse-
cing undesirable GHG-emitting activities (i.e. con- quently, the attention of financial authorities has been
tributing to a systemic climate risk). Carney also concentrated on attempts to calculate CRFR through
explicitly rules out direct interventions by financial au- climate scenario analysis and climate stress tests, which
thorities, such as adjusting the capital regime for fi- so far did not lead to significant microprudential nor
nancial institutions, to rather focus on transparency of macroprudential response [14•,20,21].
information (i.e. disclosure) and evaluation of future fi-
nancial risk (stress testing). But the impact of this speech In Europe, where climate policymaking has been high
and overall narrative centred on the imperative to avoid on the agenda over the last decade, financial authorities
financial system destabilisation from future climate have originally struggled to acknowledge that climate
change was part of their perimeter and mandates. Over 6
5
years after the creation of the NGFS, this is now much
This fits with the concept of ‘financing gap’ towards reaching those clearer, due to the strength of the financial risk narrative,
climate and biodiversity goals, whether on decarbonisation of the
economy or on ecosystem preservation and restoration.
6
For example, cooperative banking, ethical finance, Islamic finance,
7
and sustainable finance. And sometimes to employment, for example, the Fed in the US.

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 Climate, biodiversity and financial authorities Chenet 3

Figure 1

Current Opinion in Environmental Sustainability

Schematic links between finance and the environment: positive and negative impact from finance, and financial risk from environmental degradation.
By financing and investing in economic activities and financial assets that are tied to the real economy, whether at household, business, or public
institution levels, finance can trigger/allow/foster impacts on the environment. For a given issue (e.g. climate change), these impacts can be seen as
contributing either to the problem (e.g. emission of more GHG as a consequence of financing new fossil fuel extraction) or to the solution (e.g. emission
of less GHG as a consequence of financing new renewable energy capacity). Reciprocally, damages to the environment — or reactions and
anticipations to these damages — may impact households, businesses, or public institutions in their economic capacity, thereby affecting their
economic and financial performance, and ability to reimburse loans or pay dividends. This constitutes the basics of financial risk.GHS, greenhouse
gas.
Source: Chenet (2023) [9].

which has even gained importance by expanding its The current approach and the many
focus to biodiversity loss beyond climate change as the fundamental and applied issues it poses
sole banner for environmental issues. Indeed, the recent It is also quite recent that this fundamental connection is
recognition by central bankers that the collapse of bio- being investigated by academic research. From the per-
diversity is a source of financial risk leaves no space for spective of ‘environmental economics’ and in parti-
financial authorities to ignore it. This quote from the cular with the renewed inputs and framing of ‘ecological
President of the Dutch central bank provides a good economics’ approaches from the late 1980s, the importance
illustration: of nature and ecosystem services in the running of our
economic systems was duly introduced, although highly
“The rapid degradation of nature is threatening debated theoretically [23–26]. Nevertheless, the natural
ecosystems and the services they provide. Services environment continued to be essentially ignored by fi-
such as clean water, healthy air, food and materials nancial institutions and the financial economics discipline
that are all essential to our economies and our very over the last [2-3] decades, and reciprocally, finance kept
existence as humans. As central banks and super- on being not much touched upon by environmental in-
visors, we have every reason to be concerned, be- stitutions and sciences [3,4,27,28]. One could have ima-
cause it’s an illusion to think we can preserve gined a different outcome, as the financial system
financial stability if this degradation continues. A progressively took a massive weight in our economies
degradation to which financial institutions under during this period of global financialization, which saw a
our supervision also contribute through the activ- parallel escalation of global environmental issues.
ities they finance. A degradation that in turn cre-
ates risks they need to manage. Therefore it's The new dynamic described in previous sections has
squarely within our mandate to address these risks been steered essentially by practitioners and ‘field ar-
and to use our leverage to bend the curve. From bitrageurs’ [8•] over the last few years, and the academic
nature degradation to nature restoration.” [em- research did not initially follow such a convergence of
phasis added] [22] both topics and approaches. It is only very recently that

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4 Climate Finance, Risks and Accounting

researchers started to approach the issue across tradi- an achievable quest in the presence of radical un-
tional academic disciplines and objects. From that per- certainty.9
spective, the contribution of ‘systems science’ and
‘Earth system science’ is very useful and opens exciting Moreover, even if those computation ventures were
outlooks [29•–31]. First, it helps to envision climate and theoretically and practically possible, approaching bio-
finance as part of the same systemic issue and then to diversity loss (or climate change) in an isolated manner
‘zoom out’ and reframe that issue as part of a broader entails likely misestimates, by missing the complex
question concerning the embeddedness of the economy feedback and compound effects driven by interactions at
and finance in nature. the system level [44•,45], which may conduct to mini-
mising the interpretation of consequent results and
Regarding a systemic tool like that of finance, this ‘natu- making inappropriate decisions. Beyond financial issues,
rally’ conduces to consider systemic climate change as just this question of interactions, synergies, and trade-offs is
one of the many nature-related systemic processes and becoming central at the interface between Earth system
issues that we must address. Others, such as biodiversity science and policymaking, particularly after the COVID-
loss, changes and impacts related to water, land use, or 19 turmoil reshuffled the cards [52–57]. Considering a
novel entities [29•,32], are to be considered similarly. broad, long-term, and systemwise perspective is cer-
tainly a sensible way forward, especially at a time when
This is how, shortly after climate change, the subject of complexity and global interconnectedness are every day
the loss of biodiversity was approached by financial au- more blatant.10
thorities [33•–40]. But this positive step towards a more
complete approach suffers from two main flaws:
How to move beyond a paradigm driven by
– It followed a similar path than for climate: anchored the calculation of financial risk?
into a financial risk narrative [41–43]; We have seen above that the usual ‘computational’ route of
– It failed so far to address the issue systemwise and financial risk management is a potential dead end, in par-
sticked to a siloed approach [44•,45]. ticular, because of the heroic calculation it would require.
However, this does not dismiss the necessity to consider
By ignoring, as mentioned above, the impact of financial the climate systemic risk from the perspective of the fi-
activities on nature,8 the financial risk focus has the nancial system. Instead of solely attempting to ‘manage’
advantage in the first place to legitimise the action of the financial risk when it becomes material, an alternative
financial authorities without challenging their current way consists of rather ‘preventing’ it ahead of its occur-
mandates, but it also suffers from a question of feasi- rence. Such an ex ante mitigation of the risk instead of a
bility [42]. Today, most of the ‘biodiversity endeavour’ ‘syn’-adaptation can be seen as a precautionary approach,
of financial authorities and associated stakeholders, in as introduced by Refs. [14•,44•,47]. Acting in a precau-
the academia, international institutions, and civil society, tionary way to mitigate the environment-related financial
concentrates on the assessment of exposures of financial risk corresponds in the first place to alleviate the source of
portfolios to biodiversity loss. This notion of ‘exposure’ the risk, that is, fighting environmental degradation itself.
has the advantage of being directly linked to the un- That is genuinely the sense of the ‘greening the financial
derlying economic activities that may depend on and/or system’ role that, as detailed above, nevertheless tends to
impact biodiversity. But ultimately translating such an be veiled behind the objective of financial risk manage-
exposure to biodiversity loss into quantitative figures of ment. But we see with this notion of financial risk en-
financial risk at financial institution and financial system dogeneity [58•] — that is, the financial system contributes
levels — similar to what is attempted for climate with to generating the financial risk it tries to circumvent — that
scenario analysis [46] — is not assured. Computing such both roles/objectives are somehow equivalent. Mobilising
types of environment-related financial risk is indeed the power and tools of financial authorities to mobilising
highly intricate, and ultimately questions whether it is capital for the ecological transition (including by de-mo-
bilising the capital allocated to deleterious economic ac-
tivities) will undoubtedly decrease the financial risks the
financial system is exposed to.
8
NB: this does not mean that the impact of finance on nature is
completely neglected by financial authorities, as it is in fact increas- A number of tools have been analysed in the literature
ingly mentioned by reports (e.g. [33•]) and speeches (e.g. “A de-
9
gradation to which financial institutions under our supervision also contribute Radical uncertainty is especially characterised at large space and
through the activities they finance.” [22]), but when it is, it is still often time scales — for example, global level, 2100 horizon — due to the
considered only as for the endogenous financial risk it ultimately incommensurable degree of complexity and multiplicity of possible
constructs [29•,35•,47] — as highlighted in the full quote from [22] — futures that have to be scenarized in such modelling exercises
and not for itself (cf. the notion of ‘intrinsic value of nature’) nor for the [42,44•,47–51•].
10
risks it could build for other stakeholders beside financial ones. Cf. the notion of global megatrend [66,67].

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 Climate, biodiversity and financial authorities Chenet 5

that can be employed to contribute to this dual goal, in price and financial stability mandate. This involve-
the form of either monetary or prudential instruments ment of central banks beyond the market neutrality
(see e.g. [59,60] for recent reviews and references principle [63–65] involves renewed coordination be-
therein).11 Prudential tools, whether micro (e.g. sus- tween political and delegated authorities [57], notably
tainability risk weight in capital requirements) or macro to address or arbitrage the trade-offs arising from the
(e.g. countercyclical buffers), are by nature designed to conjugation of multiple policy objectives together.
manage financial stability issues, while monetary in- Other countries (e.g. Brazil and China), thanks to the
struments such as collateral frameworks or asset pur- explicit economic development mandate of their fi-
chase programmes are more fit with the dynamics of nancial authorities, benefit from a more straightfor-
capital mobilisation. ward coordination context and began earlier to
mobilise their monetary policy for the purpose of
The use of prudential instruments has mainly been greening their economy.
blocked so far by the nonconclusive quantitative ap-
proaches deemed to calibrate any such response.
Conclusions and challenges for research
Acknowledging the limitations of these justifies
We have seen that financial authorities have made an
adopting a precautionary approach instead, which would
outstanding acceleration in considering climate change
allow unleashing the use of both the prudential and
and biodiversity in their perimeter, in less than a decade.
monetary toolbox, thus overcoming both the risk calcu-
But besides the incontestable success of such a turning
lation flaws and the narrow-mandate obstacle at the same
point — with central banks and financial supervisors
time. Of course, opening such new possibilities does not
being certainly the last such type of key institutions to
mean the implementation would be straightforward.
join the climate change discussion (but to some extent a
relatively early one on biodiversity loss) — a couple of
The extent to which financial authorities can use their
fundamental flaws weaken the prospect of a possible
monetary policy power to feed the transition financing
positive impact in the short term.
axis, beyond financial risk management, is indeed far
from clear and consensual but is rapidly evolving.
Ways forward include the imperative for financial au-
thorities to approach the ecologic emergency beyond a
Making use of monetary policy for climate purpose is
sole financial risk issue. This is nevertheless not
undeniably a sensitive topic. If some central bankers
straightforward and relies on the necessity to funda-
explicitly discard it for largely overpassing their man-
mentally question the expectations societies collectively
dates (cf. the US Fed),12 the community is now
have on the role(s) of the financial system in the desired
opening the way for such possibilities [61,62].13 While
transition to a net-zero and nature-positive future. One
this seemed totally infeasible three years ago, some
cannot just simply expect the financial system to sud-
central banks have started to implement new mone-
denly turn into a for-purpose tool; hence, this funda-
tary frameworks for climate-related purposes, even in
mental shift away from a pure financial risk paradigm
high-income countries. Thanks to their secondary
needs to be planned and governed properly, which raises
mandate to support the economic policies of their
paramount questions of social organisation, politics, and
jurisdiction, the Bank of England and the European
democratic debates.
Central Bank could open the way to, for example,
carbon-tilted collateral and corporate bond purchase
It is also a challenge for associated scientific research,
frameworks. Even without any such secondary man-
which must embrace the topic beyond siloes, with
date, and thereby implicitly adopting a kind of pre-
transdisciplinarity and systemic approaches to address a
cautionary approach, the Bank of Japan issued a zero-
diverse set of complex, uncertain, and yet existential
interest green financing scheme, recognising that not
objects. Earth and Finance are indeed two particularly
supporting the net-zero transition would be against its
intricate and multidimensional systems, which in our
present case need to be treated simultaneously. This
11 undoubtedly opens up new research challenges that will
The “INSPIRE Toolbox of policy tools available to central banks
and financial supervisors” [68] actually details a third category (‘other have to combine a variety of academic disciplines and
policies’) beyond monetary and prudential tools. Other instruments, scientific approaches, capable of coalescing elements as
such as credit policy by the central bank, can be seen to overlap both contrasting as the physical laws ruling the climate and
monetary and macroprudential policies [69]. the animal spirits governing human behaviour.
12
Cf. US Fed Chair J.H. Powell: “We are not, and will not be, a ‘climate
policymaker’” [70].
13
The most recent leap on the matter is the French President Macron Data Availability
advocacy for a dual interest rate for green/brown assets. https://www.
lemonde.fr/en/opinion/article/2023/12/29/emmanuel-macron-our-
strategy-must-be-to-speed-up-the-ecological-transition-as-well-as-the- No data were used for the research described in the ar-
fight-against-poverty_6384821_23.html ticle.

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6 Climate Finance, Risks and Accounting

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