Quantifying Financial Impacts of Biodiversity? Conceptual and Theoretical Frameworks, Limits, and Implications

Abstract

The issue of biodiversity has entered the sphere of finance very recently, following the recent precedent of climate change. This encounter questions whether the living world and its natural complexity can be integrated within a domain dominated by numbers, prices and economic rationality. This paper focuses on the evaluation of financial risks related to biodiversity loss, which is the primary approach taken by financial system stakeholders to consider nature. We review the different conceptual and theoretical frameworks called upon to apprehend, capture, and integrate biodiversity into the financial system from the perspective of ‘macrofinance’, i.e. financial institutions, but also financial supervisors and monetary authorities. We analyse in particular the challenge of quantifying how biodiversity loss can affect a financial product, portfolio or institution through the use of traditional concepts such as prices and financial risk and examine the main limitations and implications of such approaches, in the face of alternatives based on strong sustainability or double materiality.

Keywords: Biodiversity, Financial Stability, climate change, financial risk, modelling

JEL Classification: Q54, Q57, E44, E58, G28, G14