Why financial regulators need to consider ocean biodiversity

As the largest and most complex ecosystem on the planet, the ocean plays a key role in efforts to address the interrelated challenges of biodiversity collapse and climate change. Despite this, its dynamics have only been inadequately included in financial approaches intended to mitigate them. Financial regulators are increasingly aware of the multiple links between the climate and biodiversity crisis and the financial system and how nature is impacted by financial flows. They now need to fully integrate ocean biodiversity into their approaches.

The language of risks and potential tipping points can help to bring these interactions to the fore. Physical risks to ecosystems and projects are supplemented by transition and liability risks for industries that, when impacts are fully considered, will no longer be able to operate with social license. Financiers need appropriate screening tools for nature risks, full due diligence along supply chains, and adequate disclosure based on a comprehensive taxonomy that reflects impact metrics. Only in this way can financial flows be redirected to facilitate the protection and restoration of natural habitats while also delivering systemic benefits and economic returns. This requires that climate transition pathways fully reflect biodiversity constraints and limitations, specifically in marine and coastal areas.

Blue natural capital, that is the wealth of coastal ecosystems reliant on foundational species such as corals, mangroves and seagrasses, encompasses highly diverse and productive habitats on which many coastal and island communities depend for food and livelihoods. The continued degradation of these habitats puts them at serious risk of collapse and threatens entire economies. Their protection, with a particular focus on nature-based solutions, would deliver multiple benefits to people and nature. Eutrophication, pollution, and ocean deoxygenation (1) contribute to the creation of large marine dead zones, undermining not only fish stocks and ocean and human health today but limiting the options for a sustainable future blue bio-economy in the future. Major ocean tipping points, such as changes in the ocean circulation as a result of melting ice can have even broader system effects, including to the ocean micro-biome and phytoplankton, which is key to carbon recycling.

Financial regulation should accordingly address not only those sectors affected by these crises, but should extend to those causing impacts, as well as their investors and financial partners. All of these are under a duty of care to the ocean and to future generations, and directors need to take on appropriate fiduciary responsibility. As Agustin Carstens, Head of the BIZ, so clearly stated at the Green Swan conference, financial regulators and central banks cannot be “missing in action” but rather need to use all the instruments at their disposal to address these core societal challenges.

The adoption of the System of Environmental-Economic Accounting (SEEA) Ecosystem Accounting in March 2021 recognizes at UN level the value of nature in economic planning, decision-making and reporting, and offers a starting point for integrating ocean assessments. The Global Ocean Data Inventory compiled by ESCAP uses components of the Ocean Accounts Framework. A continuing challenge is the integration of the international ocean. While data are available on areas beyond national jurisdictions for the compilation of ecosystem extent and condition accounts, data on pressures, services, and beneficiaries are under-represented and additional data and monitoring is required.(2)

A new decree under Article 29 of the French law on Energy and Climate requires financial institutions to publish information on the portion of their assets complying with the environmental criteria set out in the EU Taxonomy. The Taskforce on Nature-related Financial Disclosures (TNFD) suggests a double materiality concept and includes disclosure recommendations for both impacts and dependencies on nature. The De Nederlandsche Bank (DNB) study, “Indebted to Nature” found that Dutch financial institutions alone have EUR 510 billion of exposure to biodiversity risks. The ENCORE tool developed by the Natural Capital Finance Alliance can help central banks in the assessment of financial biodiversity risk, identifying how different business processes are dependent on a range of ecosystem services. The international community needs to insure against extinctions and the loss of marine diversity within national EEZs and in the high and deep seas, whilst protecting many market and non-market values for the benefit of both current and future generations.

There is also a need to engage Multilateral Development Banks at all levels (3) so that they can play a lead role in setting common standards, bringing in private sector partners, and implementing nature-based solutions throughout their portfolios. The Operationalization Framework on Aligning with the Paris Agreement provides key guidance but needs to fully integrate ocean biodiversity challenges.

Financial regulators and central banks need to play a central role. Monetary policy needs to reflect ocean and climate change; financial stability assessment needs to include preparedness for ocean, climate and biodiversity transition risk as well as comprehensive stress-testing of banks and adequate pathway scenarios. Central bank investment policy needs to reflect social and environmental standards. A proven method to exclude companies that cause harm to nature is negative screening. Gaps in the Basel Framework will need to be addressed comprehensively, focusing on common disclosure standards and establishing a regulatory framework that fully reflects risks to all asset classes. The NGFS (Network for Greening of the Financial System) is working on an updated scenario analysis approach and ways to incorporate climate risks into decisions and operations. This approach needs to reflect ocean health issues much more systematically.

Today on World Ocean Day we have published two new papers that explain “Why the Ocean matters in Climate Negotiations” and make the case for “Financing a sustainable ocean economy”. The G7 Climate and Environment Ministers Meeting in May gave commendable commitments but did not focus on the centrality of the ocean. On World Ocean Day we would like to encourage the G7 Leaders next week to follow the voice of science and commit to a comprehensive funding approach to the ocean, biodiversity, and the climate crisis.(4)

(1) Laffoley D, Baxter JM, Amon DJ et al. Eight urgent, fundamental and simultaneous steps needed to restore ocean health, Aquatic Conserv: Mar Freshw Ecosyst. 2020
(2) See section 13.5 of SEEA
(3) Thiele, T., von Unger, M., Mohan, A. (2021). “MDB Engagement: Mainstreaming Blue Nature-based Solutions into Infrastructure Finance” . Report by Silvestrum Climate Associates
(4) Amon, D et al. Seven Asks for the G7. IPSO Brief. 2021