Central Banks Should Consider Climate And Biodiversity Shocks When Stress Testing Financial Institutions

Sylvie Goulard, Deputy Governor of the Banque de France, the French central bank, stated in a speech on October 24 that central banks need to take more aggressive action regarding nature-related risk. She posited that "monetary assessments of ecosystem services have many limitations," in part because of their complexity and also because "shocks" in one sector can have significant impacts on other sectors. As a result, she proposed that "the best risk mitigation strategy is to do everything in our power, early enough, to ensure that we remain within planetary boundaries." She proposed that central banks incorporate climate and biodiversity impacts into their decision-making as an aspect of their "non-monetary portfolios;" integrating nature-related concerns into central banks' monetary operations, as the European Central Bank has begun to do for climate change, and implement nature-related stress testing exercises that address both climate and biodiversity shocks