SUSREG 2024: progress on climate in banking and insurance supervision but nature loss remains neglected despite dangerous “tipping” points
With the launch of its SUSREG assessment 2024 today, WWF´s Greening Financial Regulation Initiative (GFRi) urges the financial regulatory sector to take faster, collective action in the face of increasing nature loss that may trigger irreversible “tipping points”. The WWF Living Planet Report 2024 indicates a catastrophic 73% decline in the average size of monitored wildlife populations in just 50 years (1970-2020). As the Earth approaches dangerous tipping points posing grave threats to humanity, a huge collective effort will be required over the next five years to tackle the dual climate and nature crises.
On a positive note, this year's assessment finds that banking and insurance supervisory authorities are making progress to address the financial risks posed by climate change: supervision measures increased by 18% and 17% respectively between 2021 and 2024. However, it is important to note that insurance supervision consistently falls behind banking supervision. Notably, the European Union, Singapore, Malaysia, Hongkong, the UK, and Brazil are imposing stringent climate-related risk regulations and supervision measures for the financial sector. A growing number of supervisors and regulators are now also requiring financial institutions to disclose their climate targets and transition plans, in alignment with the Paris agreement. Financial supervisors like the European Central Bank also set strict deadlines, requiring financial institutions to fully align with its supervisory expectations on climate-related and environmental (C&E) risks by the end of 2024.
However, in most jurisdictions, central banking and monetary policy tools do not yet incorporate climate, let alone environmental risks. A few central banks, including Bank of England, Banque de France, Monetary Authority of Singapore, and Bank of Slovenia, have begun phasing out harmful assets from their investments in companies whose economic activities significantly contribute to climate change, including exposures to coal and fossil fuels.
Faster action is needed considering current national climate commitments are not strong enough and could result in a global temperature rise of 3°C by the end of the century. Additionally, the accelerated loss of biodiversity could trigger multiple dangerous “tipping points”, causing abrupt and irreversible changes to our planet (WWF LPR 2024).
When it comes to nature-related financial risk, this year's assessment finds that 7 of the top 10 biodiversity hotspot nations are lagging behind in banking supervision for nature-related risks, and all 10 are falling short in integrating these risks into insurance supervision. This is a worrying trend, considering many economic activities that continue to drive nature loss in those countries are financed and underwritten by banking and insurance sectors. Environmentally harmful investments such as direct payments, tax incentives and subsidies that exacerbate climate change, biodiversity loss and ecosystem degradation are estimated at almost US$7 trillion per year. In contrast, positive financial flows for nature-based solutions amount to a mere US$200 billion, a significantly smaller number.
Maud Abdelli, WWF’s Greening Financial Regulation Initiative lead, said: “ Climate-related and environmental risks are not simply new risk categories; they are fundamental drivers that permeate existing prudential risk categories within the financial sector. Current action by central banks, financial regulators and supervisors is much too slow, and is falling short of what’s needed to achieve the global Climate and Biodiversity Goals and avoid “dangerous tipping points” that will cause devastating impacts to our planet and economy.”
Siti Kholifatul Rizkiah, WWF’s SUSREG Lead, said: “The next five years are critical for setting the world on a sustainable trajectory. The cost of inaction is far too great to bear, and the consequences are unthinkable. Central banks and financial regulators should start tackling nature-related risks in the financial system through stronger financial supervision and enforcement measures. Only by doing so can we ensure that the financial system becomes a powerful force in protecting and restoring our natural environment and the planet we depend on.”
WWF strongly advocates for regulatory frameworks to take a precautionary approach and incorporate nature-related risk into all prudential supervision measures. These need to focus on risk management & monitoring, additional capital requirements to account for these risks, and stress test modelling that include nature risks and withstand adverse scenarios. Furthermore, enhancing qualitative and quantitative disclosures are important to hold the financial sector accountable. This means increasing the scope of disclosures to include nature and adopting best practice frameworks such as those developed by the Taskforce on Nature-related Financial Disclosures (TNFD). A crucial part of the central banks and financial supervisors´ mandate is to set climate and nature targets with a concrete, measurable roadmap or action plan detailing how these goals will be achieved. Such a roadmap needs to prioritise the key milestones of halving greenhouse gas emissions from 2019 levels and becoming nature positive by 2030, as well as limiting global warming to 1.5ºC and achieving full biodiversity recovery by 2050.
About the WWF SUSREG Assessment
In 2021, WWF launched the first Sustainable Financial Regulations and Central Bank Activities (SUSREG) assessment to evaluate how environmental and social risks are integrated in regulatory and supervisory practices, as well as in central banking and other financial activities that support the redirection of financial flows towards more sustainable practices. The aim of the assessment is to help central banks and financial supervisors benchmark their policies against emerging regional and global good practices with the overall goal of redirecting financial flows toward sustainable practices, and moving away lending, underwriting and investment from the most environmentally harmful businesses and sectors, in support of a net zero, nature positive economy. Countries assessed are mostly members and observers of the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors (IAIS), and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). Assessments are published on a yearly basis, with an accompanying annual report. Assessment indicators have been extended this year with three new indicators on (i) integration of oceans and marine life in supervisory expectations or regulation, (ii) implementation and monitoring report from supervisor to publish the progress of financial institutions in meeting their supervisory expectations, and (iii) intervention action concerning financial institutions that fail to align with their supervisory expectations.
Individual country results of the assessment are available on the online platform SUSREG Tracker here. With an initial focus on banking supervision, the SUSREG framework will be gradually expanded over the years to cover other key parts of the financial system such as capital markets and asset management.
