ECB stresses the legal implication of nature-related risks for financial institutions and their supervisors

Mr Frank Elderson, a Member of the Executive Board and Vice-Chair of the Supervisory Board of the European Central Bank (ECB), delivered an important keynote speech at the European System of Central Banks (ESCB) Legal Conference on 6 September 2024. He highlighted two growing legal ramifications of nature degradation for the financial sector: nature-related litigation and the impact on central banks’ and supervisors’ mandates. Below, we summarise Mr Elderson’s key points, underscoring the necessity for central banks and financial institutions to address these pressing risks in light of the ECB's stepped-up climate supervision work.

Mr Elderson had already flagged the risks of climate litigation in the banking sector during last year’s ESCB Legal Conference, in his keynote speech “Come hell or high water”. These keynote speeches follow the ECB’s 2022 reforms aimed at decarbonising its corporate bond holdings (as we reported here), which led NGO ClientEarth to withdraw its landmark lawsuit filed in Belgium. The lawsuit had challenged the ECB’s quantitative easing programme for not sufficiently considering climate change criteria (as we reported here). 

Nature degradation and financial vulnerability

• Scientific consensus on nature risks: Mr Elderson opened by referencing the 2019 Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) report. This report heightened concerns about how nature degradation can exacerbate emerging infectious diseases in both animals and humans just before the COVID-19 outbreak. 
• Economic vulnerabilities: The ECB identified that a significant portion of euro area companies are highly dependent on ecosystem services, with 72% potentially facing critical economic problems due to ecosystem degradation. Key sectors such as agriculture, real estate, construction, and healthcare are heavily exposed to these risks. The Financial Stability Board and the Network for Greening the Financial System (NGFS) similarly recognise these dependencies and the ensuing risks.
• Ecosystem services and tipping points: Mr Elderson emphasised that the degradation of nature impacts vital ecosystem services like food, water, and carbon uptake. He warned that “[t]hrough these tipping points, we are at risk of going beyond the Earth’s safe operating space for sustaining life on the planet,” indicating the potential for catastrophic and irreversible changes.

Nature-related litigation

• Rising trend: Building on the concept of climate-related litigation, there is a growing trend of legal actions addressing biodiversity crises and ecosystem degradation. “Litigants are starting to understand the link between climate change and nature degradation and are using the legal system to drive policy change,” noted Mr Elderson.
• Categories: Most cases target states and public entities using fundamental rights arguments, but an increasing number are also directed at corporates and banks. Mr Elderson highlighted that, “[t]his contrasts to the trends we saw under climate litigation, where cases against the private sector were much slower to start.”
• Legislative drivers: New EU legislation, like the EU Directive on corporate sustainability due diligence (see more here) and the EU Deforestation Regulation (see more here), facilitates holding multinational companies accountable for environmental harm in their supply chains, and even banks financing such companies.
• Scientific and judicial recognition: Advancements in understanding the climate-nature links strengthen litigants’ cases, while courts increasingly accept scientific findings on environmental degradation as facts.

Implications for financial institutions and supervisors

• Expectations of the ECB for financial institutions: The ECB has set clear expectations for financial institutions to identify, measure, and manage climate-related and environmental risks. They need to incorporate nature-related risks into traditional risk categories, from credit to market risks, meeting specific deadlines. Mr Elderson stated that the ECB “sees it as a driver for each traditional type of risk reflected in the Capital Requirements Directive.”
• Implications for the ECB: Mr Elderson stressed that “[t]he nature crisis could have direct implications for price stability – the primary objective of the ECB,” and highlighted the ECB’s ongoing work with its Climate and Nature Plan 2024-2025. He also noted the legal bases in EU Treaties mandating the integration of environmental protection into ECB policies. 

Conclusion

Mr Elderson concluded by stressing the urgency of addressing nature-related risks, alongside climate-related risks: “Time is running out to prepare for the materialisation of nature-related risks. We need to be ready for the impact of these risks, just like we are for climate-related risks – or indeed for any other risk driver.” Financial institutions must recognise the legal implications of nature degradation, ensuring robust governance and proactive management of these emerging risks. 

For more information on Linklaters’ nature and biodiversity materials, click here.