NGFS publishes conceptual framework for nature-related financial risks

On 7 September 2023, the Network for Greening the Financial System (NGFS) published the beta version of its conceptual framework for nature-related financial risks to guide policies and action by central banks and financial supervisors.

The framework creates a shared science-based understanding of, and common language for, nature-related financial risks to help central banks and financial supervisors navigate the complexities and challenges associated with assessing and addressing these risks. The aim of this framework is to provide greater clarity on the meaning of key concepts and the way these interrelate, as well as to set out a principle-based approach to help operationalise that conceptual understanding.

The framework seeks to:

• Define nature-related financial risks and related concepts that are needed for a high-level understanding of these risks.
• Offer a framework to help central banks and supervisors identify and assess nature-related financial risks. The principle-based risk assessment framework consists of three phases: identify sources of physical and transition risks; assess economic risks; assess risk to, from and within the financial system.
• Outline the next steps to be taken by the NGFS Taskforce, including bridging the modelling and data gaps (notably on the development of nature-related scenarios), and using emerging datasets to support the alignment of policies on environmental sustainability and inform the assessment of nature-related financial risks.

The framework will be refined and supplemented over time. Before the end of the first half of 2024 the NGFS Taskforce aims to supplement the framework with illustrative case studies and evaluate whether it needs to be updated. Also, the next task is to bridge modelling and data gaps that emerge from the framework. One notable gap that has already emerged is the need for scenarios to facilitate forward-looking risk assessments of nature-related financial risks.

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