Saturday

4th Feb 2023

Analysis

What do flamingos and central bank bosses have in common?

  • A gathering of flamingos is called 'flamboyance' (Photo: Flickr)
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A flock of flamingos is called a "flamboyance" — an apt term for these flame-feathered creatures who one could imagine look like a swell of pink fire as they swoop down from one mass of shallow water to the next.

Central bankers also move in flocks as they gather in governing councils, boardrooms and courts to manage financial risk in a chaotic system dominated by a single currency, the dollar. But far from invoking spectacle and wonder, they aim to guard price stability and calm markets into submission.

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But both species share a planet. Preventing its destruction is of existential importance to both, the difference of course being that flamingos are wholly dependent for their survival on our ability to prevent planetary destruction.

It has become an accepted fact that those at the levers of financial power have a vital role to play. But as far as green monetary policies go, central bankers have so far limited their scope to climate change.

To date, no central bank has explicitly incorporated biodiversity and ecosystem into its monetary policy operations—(although a group of 121 central banks this year did acknowledge biodiversity loss could have significant financial implications).

This relaxed attitude is no longer tenable, say a group of economists.

Beyond climate

In a paper titled Beyond Climate published on Friday (9 December), coinciding with the COP15 UN biodiversity summit in Montreal, economists call on central banks to wield their monetary and regulatory power to prevent further ecosystem and biodiversity decline.

The group of authors, seven in total, are economists connected to the London School of Economics, SOAS University of London, Banque de France and the Bank of England.

Deforestation, species loss, water scarcity and pollution are global phenomena that are intricately linked to climate change, but their causes and effects are more location-specific, complicating central bank rule-making.

"Assessments of potential nature risks and exposures are significantly more challenging to make than for climate risks," they write.

But complexity should not be an excuse to solely focus on climate change and treat natural health as a "separate or secondary" threat, the economists add.

Dutch researchers cited in the study found that 36 percent of financial institution portfolios of listed shares are highly or very-highly dependent on at least one ecosystem service. Similar results have been found for France, Brazil and Malaysia, which is why money managers should map out risks to the stability of these ecosystems, which could destabilise the financial system.

The researchers differentiate between physical risk (loss of arable land, a decline of pollinating insect populations or the spread of disease due to reduced natural resistance) and so-called transition risks, which stem from changes in green regulation, technology and changing consumer or investor behaviour that move away from polluting sectors towards more sustainable alternatives.

Although not all extreme nature-related events triggered by biodiversity loss or shocks caused by natural causes can be factored in, not aiming to manage these risks "is akin to ignoring significant sources of economic and financial risk," the researchers write.

This can be achieved by mapping out in detail the effects economic activities have on the natural environment and by redesigning monetary policy so that financial flows will go towards companies that do not harm biodiversity or nature.

Central banks will also have to design forward-looking scenario analyses and stress tests to assess potential economic shocks that cannot be captured with the historical data financial supervisors currently base their risk assessments on.

Green extractivism

A better understanding of our impact on the natural world is also essential to avoid the dangers of what Thea Riofrancos, an associate professor of political science and author of Resource Radicals, calls "green extractivism."

Green extractivism is a term Riofrancos borrowed from Chilean activists, who use it to describe the expanding lithium mining operations in the country necessary to feed the hunger for batteries necessary for the energy transition.

The European Commission on Friday concluded a trade deal with Chile — the second-biggest producer of lithium and copper—that will give it easier access to the minerals vital to its renewable energy industry as it pivots away from Russian gas.

Chile's recently-inaugurated leftist president, Gabriel Boric, said: "We don't want projects that destroy our country, destroy communities. Chile cannot again make the historic mistake of privatising resources".

But some of the environmental harms may be hard to prevent.

Enter the flamingo — or exit?

Half of the world's lithium reserves are found in the desert wetlands of Chile, Bolivia and Argentina. Its extraction requires massive amounts of water which depletes the natural habitat flamingos depend on, and researchers have found that lithium mining, together with climate change, has led to a decline in flamingo populations.

New research also shows their decline could be an early indicator of ecosystem failure. "Due to the 'landscape scale' at which these birds interact with the wetlands, they are a barometer of overall ecosystem health," Riofrancos recently wrote in an article for Chatham House.

As long as financial regulators have not mapped out the latest scientific insights on biodiversity loss, investors will wittingly or unwittingly pour money into environmentally damaging economic activities under the guise of the energy transition.

"Given that remaining within planetary boundaries is an essential condition for human activity to thrive and for financial and price stability to be preserved," the researchers conclude, "tackling nature-related risks falls firmly within the remit of central banks and supervisors."

Brussels warns EU states against backtracking on biodiversity

European environment commissioner Janez Potocnik has called on EU member states to support a package of recently-proposed biodiversity targets, amid concerns that a collection of countries led by France is seeking to water down the proposals in order to protect fishing quotas.

Hawkish ECB rate-rise 'puts energy transition at risk'

The European Central Bank raised interest rates by another 0.5 percent to a 14-year high, and expects to hike rates by another half percent in March. But what does that mean for the green transition?

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