Financial Stability at Risk: Central Banks and Ecosystem Tipping Points#

Ecosystem Tipping Points and Financial Flows#

• Critical Ecosystems:

  • Brazilian Amazon: Stores 150–200 billion tonnes of carbon (15–20 years of global CO2 emissions). Deforestation, driven by soy (90.3% of financial flows) and beef production, risks turning it into a net carbon source, per Carbon Pulse. Financial flows include 320.2 billion in syndicated loans and 135.4 billion in capital markets issuance, primarily from U.S. and European banks. Link Link
  • Indonesian Peatlands and Mangroves: Sequester 60 billion tonnes of carbon. Palm oil production accounts for all 60.2 billion in financial flows (2014 USD), with 66.9% for general corporate purposes, led by Asian institutions. Mangrove loss exacerbates coastal vulnerability. Link
  • Boreal Forests (Russia and Canada): Hold significant carbon stocks (e.g., 367 billion tonnes in Russia’s forests). Logging and fires threaten stability, with financial flows less documented but linked to global timber markets. Link

• Financial Flows:

  • From 2016–2024, 395 billion flowed to forest-risk sectors globally, with 77 billion in January 2023–June 2024, per Forests & Finance. North American and European banks dominate Amazon financing, while Asian institutions lead in Indonesia. Link
  • Capital markets facilitate 29.7% (Amazon) and 36.8% (Indonesia) of flows, often off-balance-sheet, reducing accountability. Most funds (73.7% Amazon, 66.9% Indonesia) support general corporate activities, not sustainability. Link
  • The WWF/UCL IIPP note identifies 39 companies linked to land-use changes, supported by concentrated financial hubs, offering intervention points for regulators. Link

• Tipping Point Risks:

  • ETPs could disrupt ecosystem services (e.g., carbon sequestration, pollination, rainfall cycling), impacting agriculture, hydropower, and global supply chains. The Amazon’s collapse could alter global rainfall patterns, costing poorest countries 10% of GDP annually by 2030, per World Economic Forum. Link Link
  • Carbon release from ETPs (220 billion tonnes across these ecosystems) could accelerate climate change beyond current models, increasing physical and transition risks for financial systems. Link
  • Globalized value chains amplify risks, with teleconnections spreading impacts (e.g., Amazon deforestation affecting Asian monsoons). Link

Current Regulatory Gaps#

• Inadequate Risk Models: Current CBFR approaches rely on scenario analysis and stress testing, which underestimate ETP risks due to their non-linear, irreversible nature. These models fail to capture systemic impacts, per WWF/UCL IIPP.
• Voluntary Initiatives: Over half of the top 30 banks financing deforestation are members of the Principles for Responsible Banking (PRB) and Net-Zero Banking Alliance (NZBA), yet show no reduction in harmful flows, indicating greenwashing, per Forests & Finance. Link
• Regional Disparities: The global South, led by Brazil, Singapore, and Malaysia, integrates nature-related risks into banking regulations faster than the global North, with €75 trillion in assets under nature-focused prudential frameworks, per UNEP FI/WWF (December 2024). Link

Alignment with Global Initiatives#

• Kunming-Montreal GBF: The GBF’s target to mobilize 200 billion annually for biodiversity by 2030 aligns with the note’s call for redirecting financial flows. The WBG’s 600 million private capital mobilization and 4 billion in FY24 biodiversity investments (e.g., Rhino Bond, Seychelles Blue Bond) support this goal. Link
• Paris Agreement and COP30: The Amazon’s risk of becoming a net carbon source, highlighted at COP30 (Brazil, November 2025), underscores the note’s urgency for climate-biodiversity integration, as seen in Denmark’s 2024 Green Tripartite Agreement. Link
• WWF’s Greening Financial Regulation Initiative: Awarded the UN’s ISAR Honours 2024, it advocates embedding nature risks in G-SIB regulations, including capital buffers and stress testing, per ESG News. Link Link

Opportunities and Risks#

• Opportunities:
  • Regulatory Interventions: Macroprudential tools (e.g., higher capital requirements for deforestation-linked loans) and monetary policy adjustments (e.g., green collateral frameworks) could redirect 100–150 billion annually to sustainable projects by 2030, per OECD estimates.
  • Global Coordination: Aligning with the Financial Stability Board (FSB) and Basel Committee to integrate ETP risks could enhance financial stability, as advocated by WWF/CDP. Link
  • Nature-Positive Finance: Initiatives like the IDB’s 11 billion climate finance program (July 2025) and WBG’s Rhino Bond demonstrate scalable models for mobilizing private capital, supporting GBF and Paris Agreement goals. Link
  • Data Availability: Existing supply chain and financial flow data (e.g., UCL IIPP’s dataset) enable targeted interventions, breaking “analysis paralysis.” Link
• Risks:
  • Systemic Financial Impact: ETPs could trigger 10 trillion in global economic losses by 2050, with cascading effects on banks via loan defaults and asset devaluation, per UCL IIPP. Link
  • Debt Sustainability: High debt burdens in EMDEs (140% of GDP in some LDCs, per IMF) limit fiscal capacity to address ETPs, especially if financed by loans.
  • Greenwashing: Reliance on flawed certifications (e.g., FSC, RSPO) masks harmful financing, per Forests & Finance. Link
  • Heterogeneous Vulnerability: Some companies (e.g., Brazilian beef) are financially vulnerable to regulatory restrictions, while others with high retained earnings are insulated, complicating interventions. Link

Recommendations#

• Central Banks and Regulators:
  • Adopt precautionary macroprudential measures, such as higher capital buffers for loans to deforestation-linked companies, as suggested by WWF/UCL IIPP.
  • Integrate ETP risks into stress testing and scenario analysis, following NGFS’s ecosystem-based approach.
  • Develop international guidelines with the FSB and Basel Committee to regulate cross-border financial flows, targeting the 395 billion in forest-risk financing since 2016. Link
• Investors:
  • Divest from companies linked to ETPs (e.g., Amazon soy, Indonesian palm oil) and invest in nature-positive instruments like GSSS bonds or the Rhino Bond.
  • Use ESG data from tools like the Sovereign ESG Data Portal to assess exposure to nature-related risks. Link
• Policymakers:
  • Align national policies with GBF and Paris Agreement targets, as seen in Denmark’s Green Tripartite Agreement, to reduce emissions and restore ecosystems. Link
  • Support subnational financing, like Tanzania’s Tanga Water Green Bond, to fund local conservation. Link

Conclusion#

The WWF/UCL IIPP policy note of July 1, 2025, underscores the urgent need for central banks and regulators to address financial flows driving ecosystem tipping points in the Brazilian Amazon, Indonesian peatlands and mangroves, and boreal forests in Russia and Canada. These ecosystems, critical for sequestering 220 billion tonnes of carbon, face irreversible risks from 395 billion in deforestation-linked financing, threatening global economic stability. Precautionary macroprudential and monetary policies, aligned with GBF and Paris Agreement goals, can redirect capital to sustainable projects, as exemplified by the WBG’s 600 million mobilization and IDB’s 11 billion initiative. Investors should prioritize nature-positive investments, while regulators must integrate ETP risks into frameworks. Consult certified financial advisors for investment decisions and contact dcdpf4sd@oecd.org for policy guidance.