Posted on October, 03 2024

In a policy paper launched today, WWF´s GFRi and CDP, urge international regulatory bodies like the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision, as well as national regulatory and supervisory authorities to integrate nature-related risks into the regulatory frameworks governing Global and Domestic Systemically Important Banks (G-SIBs and D-SIBs) and strengthen major banks’ resilience to environmental shocks.

Nature-related risks pose significant threats to financial stability, with the potential to trigger cascading effects across global financial systems and economies. Systemically important banks are particularly exposed due to their size, complexity, and interconnectedness with the global economy. These banks not only face nature-related risks but they also indirectly contribute to environmental degradation through their financial investments. Therefore if left unchecked, these risks could amplify financial shocks, triggering crises similar to those seen in the past. 

In this paper, “Addressing the Giants: integrating nature in regulations for systemically important banks”, WWF and CDP argue that many of the stronger standards set for G-SIBs after the financial crisis must apply to the current nature crisis: closer risk monitoring, additional capital requirements and stress testing to withstand adverse scenarios. The same holds true to its national-level counterpart, D-SIBs. 

Using WWF’s Sustainable Financial Regulations and Central Bank Activities (SUSREG) data and disclosures by the world’s biggest banks through CDP’s reporting platform, complemented by desktop research, the paper reveals a significant gap in nature-related risk management within both regulatory expectations and bank practices when comparing the results: 


 

• Both national regulatory requirements and G-SIB action are lagging in all themes assessed in this paper (disclosure, risk management, capital and liquidity requirements, and long-term considerations).
• The current landscape of regulatory expectations on nature-related risks shows a glaring gap amongst the 11 countries assessed, with USA, Canada, and UK, showing minimal action on this front, despite 13 of the total 29 G-SIB domiciled in these countries. This highlights the need for scalable and consistent regulation to prevent regulatory arbitrage.
• Amongst the GSIBs assessed, 50% have strategies to engage clients on forest-related issues, while only one has a strategy for water security, highlighting a clear imbalance in environmental focus. Furthermore, no G-SIBs currently use scenario-based risk management for water security or deforestation, reflecting a broader lack of comprehensive environmental risk planning.

Maud Abdelli, WWF Greening Financial Regulation Initiative Lead said: “International financial regulation needs to evolve to account for nature-related risks and impacts. G-SIBs play a crucial role in the stability of the financial system and their resilience is vital to preventing failures that could lead to widespread financial crises. At the same time, G-SIBs have a significant environmental footprint and consequently have a large opportunity to mitigate their negative impacts on nature. To that end, a coherent, coordinated approach among supervisors and the intervention of international standard setters is needed.” 

Pietro Bertazzi, Global Director for Policy and External Affairs at CDP said: “CDP data shows that major banks are still flying blind to the swathe of risks posed by nature loss. We have heard before that big banks are ‘too big to fail’, but a failure to disclose and act on nature is likely to prove the opposite. Regulators must show they have learned the lessons of the financial crash and act swiftly to mandate comprehensive, holistic environmental disclosures and safeguard financial stability."

Scalable solutions and coordination are needed and they are feasible. Among others, WWF and CDP recommend the following: 
 

• For FSB and BCBS to Integrate Nature-Related Risks in Global Financial Frameworks: to embed nature-related risks into financial regulation and adapt the frameworks for Global Systemically Important Banks (G-SIBs). This includes enhancing risk management practices, adjusting capital buffers to account for environmental exposures, incorporating environmental metrics into annual assessments, and modifying systemic importance criteria to reflect nature-related risks.

 

• For National Financial Regulators and Supervisors to Strengthen Regulatory Measures for Domestic Systemic Banks: to require both G-SIBs hosted in their countries and Domestic Systemically Important Banks (D-SIBs) to integrate nature-related risks into their risk management frameworks, develop specific risk scenarios, implement systemic risk buffers, coordinate supervisory efforts across regions, incentivize improved risk management and disclosure, and enhance monitoring processes for environmental vulnerabilities.

 

• For G-SIBs, to Enhance Nature-related Actions: to elevate their nature-related disclosures and collaborative efforts by adhering to frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD). This involves aligning climate and nature policies, integrating environmental considerations into all business practices, and adjusting financial practices—such as capital and liquidity requirements—to bolster resilience against nature-related risks. 

 

• For the G20: to direct the FSB and Basel Committee on Banking Supervision to integrate nature-related risks into Basel requirements and in the G-SIB framework, mandate enhanced transparency and reporting requirements, and require rigorous nature-related financial risk assessments and supervisory monitoring for G-SIBs