With a new, deepened mandate to support a nature-positive economy, here’s what the Bank of England can do next

Elena Almeida, Simon Dikau and Maria Waaifoort examine the possibilities for the Bank’s monetary, financial and prudential remits to achieve a greater balancing of economic stability with climate resilience and environmental stewardship.

The 2024 remit letters from the UK Treasury to the Bank of England encourage a significant shift in the latter’s role by explicitly incorporating nature-related risks into its responsibilities across the Monetary Policy, Financial Policy and Prudential Regulation Committees. Most significantly, and for the first time, the Monetary Policy Committee has been tasked with supporting the Government’s objective to “accelerate the transition to a climate resilient, nature positive and net zero economy” (emphasis added). The Financial Policy Committee has been asked to assess the materiality of nature-related risks over the coming year, going beyond considering only their relevance.

This updated remit mandates the Bank to deepen its understanding of the complex relationship between nature degradation and climate change, and the implications of that relationship for the economy and financial system, and to consider nature- and climate-related risks together, rather than in isolation or sequentially.To rise to its remit, the Bank can take the following steps across its committees to support the Government’s economic policy

1. The Bank can begin incorporating nature degradation into its macroeconomic analysis to support the Monetary Policy Committee assessments, which can result in economic, financial and, importantly, price stability implications. It should:

• Integrate the economic consequences of ecosystem degradation into its analysis and models to reflect reduced agricultural productivity and increased natural disaster risks and mitigate the potential impacts on price stability and economic growth.
• Consider nature-loss-related impacts on the macroeconomy and price stability when adjusting monetary policy operations, and when designing measures that could have an impact on nature conservation (e.g. aligning asset purchases with nature targets, including the UK’s commitments towards achieving the Kunming-Montreal Global Biodiversity Framework and the UK Environment Act).

2. The Bank can lead by example by aligning its own non-monetary policy portfolios with nature-related goals. It could:

• Screen portfolios for nature risks to exclude assets from companies causing significant harm to nature, similar to practices by the Swiss National Bank.
• Consider and disclose the impact of climate- and nature-related risks in its own portfolios,setting a precedent for transparency and responsible investment in nature-positive assets, similar to approaches taken by the Banque de France.
• Lead by example and invest in nature-based solutions by increasing exposure to nature-positive investments to mobilise private sector capital towards nature conservation.

3. To assess the materiality of nature-related risk, the Financial Policy Committee could:

• Conduct its own assessment of nature-related financial risks,particularly by leveraging its rich banking and location data to extend the nature risk analysis already conducted by the Green Finance Institute. Additional considerations could include analysing the impacts of finance on nature degradation in the UK and globally, and the potential risks posed by the interactions between nature and climate change, geopolitical developments and production networks.
• Take the lead by following the NGFS recommendations and incorporate nature degradation in stress testing and scenario analyses to evaluate how shocks, such as ecosystem collapse, could propagate through the financial system.This could also have implications for the development of systemic risk buffers against fundamentally irreversible nature degradation.

4. To embed nature considerations into microprudential frameworks to ensure the resilience of banks and insurers, the Prudential Regulation Authority could:

• Develop nature-related governance standards for firms, such as incorporating nature-related risks into supervisory expectations, similar to efforts by the European Central Bank (ECB) and Banca d’Italia. This could involve requiring financial institutions to disclose nature-related risks (e.g. associated with deforestation or water insecurity) and developing transition plans that demonstrate alignment with nature conservation objectives.
• Assess the materiality and consider the incorporation of nature risks in capital requirements alongside climate-related risks. For instance, loans and investments in activities linked to deforestation could carry higher risk weights, incentivising shifts towards nature-positive projects.

5. To identify and address key nature-related risks such as deforestation that pose a particularly acute threat to global nature degradation and financial stability, the Bank could:

• Monitor exposure to deforestation-linked activities by assessing how deforestation risks affect its balance sheets and those of financial institutions, to better understand the transmission channels of these risks.
• Implement risk management frameworks to account for deforestation risks and incorporate them into counterparty eligibility criteria and collateral policies. Frameworks on nature-risks have already been proposed by the ECB, OECD, and De Nederlandsche Bank.
• Promote market disciplineby advising on the development of sustainable supply chains and deforestation-free commitments across industries, such as the UK Forest Risk Commodities regulation (which is included within the Environment Act, to which the Government recently confirmed its commitment).

6. Finally, the Bank should prioritise building strong capacity and enhance collaborative efforts both domestically (for example, on the development of the UK Green Taxonomy) and internationally to leverage on existing work on nature degradation. It could:

• Partner with global initiatives to conduct research and lead on policy development: for example, it could play a leading role in the Network for Greening the Financial System  on nature to enhance existing evidence-based frameworks developed by the network’s Nature Task Force and to integrate nature into all workstreams.
• Play a role in the development of taxonomies and standards by assisting in the development of financial taxonomies to include nature degradation metrics and supporting the work of the International Sustainability Standards Board to incorporate nature-related risks into sustainability reporting.
• Develop training programmes and share best practice, including by training staff on nature risks and learning from other central banks.

The inclusion of nature loss in the Bank of England’s remit reflects the UK Government’s strong commitment to addressing nature and biodiversity loss, as well as the growing recognition worldwide of the critical role central banks play in supporting a nature-positive economy. By integrating nature-related risks into its policies, the Bank can support this transition. As the Bank takes its initial steps, it can showcase how central banks can balance economic stability with environmental stewardship. The climate–nature nexus should not be understated: the twin ecological threats of climate change and nature loss should be tackled together and with cooperation across various stakeholders.