Posted on July, 01 2025

A new policy note released today by WWF´s Greening Financial Regulation Initiative and the Institute for Innovation and Public Purpose at University College London (UCL IIPP) urges central banks, financial regulators, and supervisors (CBFRs) to take a more precautionary stance toward the economic threats posed by escalating ecosystem degradation and tipping points. It provides insights to guide the adjustment of policy tools in tackling these risks and the financial system’s contribution to them.

This note builds on academic research conducted by UCL IIPP and University of Exeter’s Global Systems Institute that mapped lending and capital markets issuances to companies likely implicated in the degradation of five critical ecosystems: the Brazilian Amazon, Indonesian peatlands and mangroves, and the boreal forests of Russia and Canada.  

The note argues that these ecosystems are approaching potential ‘ecosystem tipping points’ - critical thresholds beyond which small additional pressures could trigger large-scale, potentially irreversible changes in ecosystem state. It contends that tipping points in these areas fall within the mandates of central banks and financial regulators (CBFRs), as the resulting disruptions could have significant economic and financial consequences at both regional and global levels.  These ecosystem changes are directly driven by human activities, particularly deforestation and other forms of land-use change, which are often enabled by external financing. 

“The WWF Living Planet Report 2024 makes it clear that ecosystems are being pushed to the brink. But they are not just an ecological concern, they are a serious and immediate threat to global financial stability,” said Maud Abdelli, WWF Greening Financial Regulation Initiative Lead. Our economies are deeply dependent on nature and continued degradation risks triggering irreversible changes that could leave the financial system vulnerable to ecological shocks.”

The prevailing approach by CBFR, which focuses on quantifying and managing environmental risks as if they were traditional financial risks, falls short in addressing the deep-rooted and systemic consequences of large-scale nature loss. While scenario analysis and stress testing help to understand nature-related risks, they still tend to underestimate severe risks involving ecosystem tipping points (ETPs), which are hard to model. As a result, relying solely on these assessments to inform financial policy decisions, such as the setting of capital buffers or macroprudential measures, is unlikely to build sufficient resilience against systemic ecological threats.

The note draws attention to the financial flows that continue to enable ecosystem degradation, warning that they contribute to long-term systemic physical risks for economies and financial systems from within. Notably, in some of these ecosystems, the financial flows linked to land use change originate from institutions in areas geographically distant from the ecosystem itself. In the case of the Brazilian Amazon, for example, U.S. and European financial institutions play a major role in financing companies linked to deforestation. However, in other countries such as Indonesia, land use change in the peatlands and mangroves is being financed predominantly by regional financial institutions, including Indonesian and Chinese state owned banks. These findings underscore the urgent need for stronger  international coordination to effectively regulate global capital flows, and mitigate systemic risks.

Macroprudential policymakers are uniquely positioned to address the financial sector's role in the accumulation of systemic environmental risks. As such, the policy note recommends that CBFR intervene in curbing these harmful financial flows as part of a more forward-looking and precautionary approach to financial policy.

The policy note explores how monetary policy can be aligned to support these efforts and how microprudential authorities can reinforce them by integrating environmental considerations into their supervision - while still delivering on their core mandates. Ecosystems facing tipping points form an important starting point given their potential for irreversible and systemic impacts - in line with the NGFS’s recommended ‘ecosystem-based’ approach - but must ultimately form part of broader strategies by CBFR and governments to address all pressures on nature to safeguard economic and environmental stability. 

“Central banks and financial supervisors cannot afford to wait for ecosystem tipping points to be crossed,” said Lydia Marsden Research Fellow from UCL IIPP and co-author of the brief. “Proactive, coordinated action now can help prevent irreversible damage and strengthen global economic resilience.”