Legal Implications of Nature-related Risk
The European Central Bank (ECB) delivers a speech on the legal implications of nature-related risks at the European System of Central Banks legal conference, exploring the risks arising from natural risks as well as how to assess, analyze, and manage these risks.
The European Central Bank gave a speech on the impact of climate related litigation on the financial industry at last year’s Legal Conference, stating that both natural and climate related risks are material financial risks and therefore deserve regulatory attention.
Related Post: UNEP FI Releases Recommendations for Nature-related Reporting Framework
Natural Degradation and Financial Risks
The Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services believes that natural degradation is gradually accelerating, and human use of natural resources is 1.7 times faster than their regeneration rate. This degradation weakens the ecosystem’s ability to provide services and increases the risk of humans reaching the critical point of the ecosystem. Once the critical point is exceeded, the ecosystem may undergo nonlinear and irreversible changes, leading to humans surpassing the safe operating space of the Earth.
From the perspective of regulators, natural degradation makes the economy and financial system more fragile. A study by the ECB found that 72% of eurozone companies are highly dependent on ecosystem services, particularly in the agriculture, real estate, and construction industries, which may face risks due to ecosystem degradation. The Network for Greening the Financial System considers nature related risks as a task for regulatory agencies in 2022 and has developed a framework for assessing nature related financial risks.
Development of Natural Related Litigation
The biggest legal implication of nature-related risks is the increase in the number of nature-related lawsuits, where litigants begin to understand the relationship between climate change and natural degradation and file lawsuits to prevent ecosystem degradation. The Network for Greening the Financial System has released a report on nature related lawsuits, stating that although these lawsuits are still in their early stages, their number may rapidly increase. These lawsuits may affect financial institutions and may also have indirect effects through counterparties of financial institutions.
Most natural related lawsuits are filed against public entities, while a portion are filed against businesses and financial institutions. The parties involved in the lawsuit have begun to use corporate sustainable development due diligence laws, tort laws, and shareholder laws to file claims. With the implementation of EU sustainable development laws, these cases may continue to increase. The emergence of nature related litigation stems from both the development of the relationship between climate and nature and the legal industry’s understanding and acceptance of the latest scientific discoveries in climate and environment.
Nature-related Risks and Regulatory Implications
Another important legal implication of nature-related risks is the responsibility of regulatory agencies. Solving natural problems mainly relies on legislative bodies, but central banks and regulatory agencies also need to consider regulatory matters related to natural risks. In 2020, the ECB released expected guidelines on climate related and environmental risk management, highlighting the necessity of identifying, measuring, and managing nature related risks. Natural degradation has been incorporated into the regulatory work of the ECB and is considered one of the driving factors for traditional risk types in the Capital Requirements Directive.
Regulatory agencies also need to consider nature-related risks in monetary policy. The natural crisis may have an impact on price stability, and as part of the Climate and Nature Plan, the European Central Bank is conducting research on the risks posed by natural loss and degradation to the economy. The goals of the ECB include supporting the EU’s general economic policies and contributing to the EU’s objectives. These goals include sustainable development and high-level protection and improvement of environmental quality. EU passed the Nature Restoration Law this year to provide a legal basis for nature conservation. Regulators need to be prepared for the impact of natural related risks and consider the legal implications arising from nature-related risks.
Reference:
Nature-related Risk: Legal Implications for Central Banks, Supervisors and Financial Institutions
