The European Central Bank (ECB) underscores the urgent economic implications of biodiversity degradation, far from the oft-criticized “flower power” pursuits.
The direct correlation between economic sustainability and environmental conservation is the center of the discourse, according to ECB executive board member, Frank Elderson.
Ecosystem Deterioration: A Threat to the Economy
Elderson strongly counters the notion of the ECB’s environmental focus as deviating from its primary mission. He emphasized that nature and economy are inextricably linked, arguing that “Destroy nature and you destroy the economy.”
The negative economic consequences of biodiversity loss go beyond environmental concerns; they touch the core of economics and potentially pose significant risks to price stability and inflation.
In a first-of-its-kind examination, the ECB assessed data from over four million businesses in the 20-country single currency bloc. The alarming findings reveal that a significant 72% of these companies and 75% of bank loans in the region are exposed to biodiversity loss.
These businesses rely on at least one “nature-related service” such as pollination, clean water, healthy soil, timber, or sand.
For instance, the dwindling insect populations directly impact the agricultural sector, which heavily depends on plant pollination. This disruption in the supply chain could potentially lead to inflation and destabilization of the economic system.
Looking Forward: Addressing the Risks from Biodiversity Loss
The ECB is intensifying efforts to press banks to recognize and mitigate the perils associated with biodiversity losses. In 2020, it issued a guide for lenders to overhaul their risk management and disclosure practices to address climate and environmental risks.
Despite these efforts, 40% of banks in the eurozone still have not adequately assessed their exposure to nature-related risks, according to Elderson.
However, a few progressive lenders have started to allocate capital for environmental threats in their internal risk calculations. The ECB executive member has shown commitment to motivating other financial institutions to follow suit, promising both “carrots and sticks” to encourage them to address the matter.
This fresh attention on biodiversity loss by the ECB echoes a growing trend among central banks worldwide. Other nations, including France, the Netherlands, Brazil, Malaysia, and Singapore, have conducted similar evaluations.
The Bank of England is also scrutinizing potential financial risks from nature loss, as they discovered that 72% of UK loans were issued to companies reliant on “ecosystem services.”
Despite some criticism from figures such as the former Bank of England governor Mervyn King and the US Federal Reserve chair Jay Powell, who argue central banks risk political entanglement through their work on environmental risks, the ECB remains steadfast.
It is actively examining the potential impact of shifts in government policy, consumer preferences, and investor behavior in response to environmental damage on heavily polluting companies, the banks that finance them, and the wider economy.
The urgency of addressing biodiversity loss and its economic repercussions is echoed by Elderson: “The economy relies on the services of nature.”
As the ECB continues to chart this unexplored territory, the central question becomes not whether it is mission creep but whether the mission is critical enough to warrant immediate attention and action.
