The risks associated with biodiversity loss could have severe socio-economic and financial consequences, at least as large as those imposed by climate change, in addition to interacting with them. Because of the potential threat, they pose to financial stability, Biodiversity-Related Financial Risks (BRFRs) have recently captured the attention of the financial community. As with climate risks, central banks and financial authorities might have to conduct biodiversity risk stress tests and adjust their daily operations and regulatory tools to this new normal.
However, unless appropriate biodiversity scenarios are found to build a forward-looking assessment of the consequences of physical and transition shocks on industries and sectors, meaningful inclusion of Nature-Related Financial Risks (NRFRs) cannot see the light of day. This paper aims to review and compare existing quantitative biodiversity scenarios and models on a global scale that could help fulfill this role. It also offers an assessment of the path forward for research to developing scenarios for BRFRs at each step of the process: from building narratives, quantifying the impacts and dependencies, assessing the uncertainty range on the results all the way from the ecosystem to the economic and financial asset.
The paper has several key findings. First, global and quantitative physical risk scenarios are almost absent; this is why it concentrates on transition scenarios of biodiversity. Second, most ecological transition scenarios are built in accordance with the Convention on Biological Diversity (CBD) goals, even if future land allocation varies across studies. Third, Shared Socio-economic Pathways (SSPs) do not assess the biophysical consequences of their economic growth hypothesis. Fourth, the paper highlights the need for central banks and supervisors to take into account the uncertainties inherent in both integrated models and biodiversity indicators. For the latter, the uncertainty results from measuring only a tiny fraction of global biodiversity. Finally, the study offers recommendations for central banks and financial authorities to improve their scenario selection in the shorter-term.
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