7 June 2024

Under MNB’s Green Programme, a nearly two-year research and methodological project to assess the financial risks resulting from biodiversity loss and develop a set of financial supervisory tools to address them, has come to an end. The results of the collaborative exercise funded by the European Union were presented today at an international conference.

In 2022, at the initiative of the Magyar Nemzeti Bank (MNB), the European Commission's Directorate-General for Structural Reform Support (shortly DG REFORM) launched a research and methodology biodiversity project under MNB’s Green Programme. The project aimed to assess the financial risks resulting from biodiversity loss and develop a methodological framework for financial supervision to address them. The project, funded by the EU’s Technical Support Instrument (TSI), was undertaken by the Organisation for Economic Co-operation and Development (OECD) as implementing partner, in cooperation with DG REFORM.

Accelerating biodiversity loss presents a significant risk to the economy and the financial sector. However, measuring these impacts is much more complex than quantifying climate change risks. Until recently, knowledge of biodiversity-related financial risks has been scarce worldwide. This can lead to inaccurate pricing in markets, misallocation of capital and, ultimately, increased exposure to these risks, the damage of which poses a threat to social welfare. Therefore, policymakers, financial supervisors and central banks need to thoroughly explore the implications and exposures to this risk and how they can be managed.

In the first half of the project last year, the OECD developed a general methodological supervisory framework for central banks, identifying sources of risk and transmission channels. The framework will help central banks to identify, prioritise, and assess nature-related financial risks. The details were presented by OECD representatives in a highly successful webinar.

The framework highlighted that the five main contributors to biodiversity erosion are land and sea use, depletion of natural resources, climate change, air pollution and settlement of invasive alien species. The biodiversity loss caused in turn affects the economy in the form of physical risks (e.g. disappearance of pollinators) and transition risks (e.g. corporate strategies that are incompatible with environmental regulations). As a result, the economy may experience, for example, lower production revenues and higher inflation, while borrowing companies may face financial difficulties repaying their debt.

The results of the second phase of the almost two-year cooperation and the steps taken to implement the framework in Hungary were presented today at an international hybrid conference (face-to-face and webinar) organised by the MNB, the European Commission and the OECD, entitled ‘Technical implementation of the Supervisory Framework for Assessing Nature-related Financial Risks to the Hungarian financial sector’.

The event was attended by 150 participants from around 34 countries: internationally, the European Commission, the OECD, the European Central Bank, several central banks, the European Banking Authority (EBA) and several supervisory institutions, while from Hungary, ministries, commercial banks, NGOs and the MNB were represented. During the conference lectures, several central banks shared their experiences (e.g. Georgia and Lithuania) on their biodiversity projects similar to that of the MNB, and OECD representatives also presented the results of the framework for Hungary and their future applicability. The outcomes of the analytical framework include, for example, that shocks of different severity could lead to a fall in GDP, increases in agricultural commodity prices, and an increase in the non-performing loan ratio. In the case of Hungary, the researchers identified agriculture, industry, and real estate activities as the most exposed sectors. The framework will be officially published on 30 June.

European Commission

Organisation for Economic Co-operation and Development

Magyar Nemzeti Bank