The financial regulatory sector must take faster, collective action in response to nature decline which is nearing irreversible tipping points, according to the WWF Sustainable Financial Regulations and Central Bank Activities (SUSREG) Tracker 2024.
The newly published WWF Living Planet Report 2024 indicates a catastrophic 73% decline in average wildlife populations in the past 50 years (1970-2020).
As the Earth approaches dangerous thresholds posing grave threats to humanity, a collective effort is essential over the next five years to tackle the dual climate and nature crises.
Faster action is needed. Current national climate commitments may lead to a global temperature rise of 3°C by the end of the century. Additionally, accelerated biodiversity loss could trigger multiple dangerous ‘tipping points’, leading to abrupt and irreversible changes to our planet (WWF LPR 2024).
‘The next five years are critical for setting the world on a sustainable trajectory. The cost of inaction is far too great to bear, and the consequences are unthinkable. Central banks and financial regulators should start tackling nature-related risks in the financial system through stronger financial supervision and enforcement measures. Only by doing so can we ensure that the financial system becomes a powerful force in protecting and restoring our natural environment and the planet we depend on.’
SITI KHOLIFATUL RIZKIAH
WWF’s SUSREG lead
On a positive note, this year’s assessment finds that banking and insurance supervisory authorities are making progress on climate-related financial risks.
However, insurance supervision consistently lags behind banking supervision.
Notably, the European Union, Singapore, Malaysia, Hongkong, the UK and Brazil are imposing stringent climate-related risk regulations and supervision measures.
A growing number of supervisors and regulators now require financial institutions to disclose climate targets and transition plans in alignment with the Paris Agreement.
The European Central Bank has set strict deadlines for financial institutions to align with its supervisory expectations on climate and environmental risks by the end of 2024.
However, most central banking and monetary policy tools do not incorporate climate, let alone environmental risks.
Very few central banks, including the Bank of England and Banque de France, have begun phasing out harmful investments in companies contributing to climate change, including exposure to fossil fuels.
This year’s assessment reveals that seven of the top 10 biodiversity hotspot nations lag in banking supervision for nature-related risks, and all 10 fall short in integrating these risks into insurance supervision.
This trend is concerning as many economic activities driving nature loss in those countries are financed and underwritten by the banking and insurance sector.
Environmentally harmful investments, such as subsidies exacerbating climate change and biodiversity loss, are estimated at nearly $7 trillion annually, compared with a mere $200 billion for positive financial flows for nature-based solutions.
‘Climate-related and environmental risks are not simply new risk categories; they are fundamental drivers that permeate existing prudential risk categories within the financial sector. Current action by central banks, financial regulators and supervisors is much too slow, and is falling short of what’s needed to achieve the global Climate and Biodiversity Goals and avoid ‘dangerous tipping points’ that will cause devastating impacts to our planet and economy.’
MAUD ABDELLI
WWF’s Greening Financial Regulation Initiative lead
WWF advocates for regulatory frameworks to adopt a precautionary approach, integrating nature-related risks into all prudential supervision measures.
These should focus on risk management, additional capital requirements, and stress testing that includes nature risks.
Central banks and supervisors must set clear climate and nature targets in transition plans with measurable roadmaps.
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