Banking on nature: new study links nature loss to corporate credit risk
Three Singaporean banks have joined forces with Cambridge University to publish first-of-its-kind report on nature-related risk in lending portfolios
By the time the historic Kunming-Montreal Global Biodiversity Framework (GBF) was adopted in December 2022, financiers had already been investigating how financially material nature loss really is. Earlier that year, Aon mapped nature-related risk exposure across financial indices. Robeco, an asset manager, studied how vulnerable listed companies were to land degradation and NatWest Group identified how agribusinesses might be affected by it.
Awareness of the financial materiality of nature loss has been on the rise ever since. While the examples of 2022 were concentrated in western economies, awareness is now moving east.
For the past 18 months, three Singaporean banks – DBS, OCBC and UOB - in collaboration with the University of Cambridge Institute for Sustainability Leadership (CISL) have been investigating how nature-related dependencies translate into credit risk.
Nature dependence
The study, supported by the Monetary Authority of Singapore (MAS), began in January 2024. The research premise is that if over half of global GDP is nature dependent, the wholesale loan books of the three banks must be too.
“We were delighted to collaborate with DBS, OCBC and UOB on this pioneering use case that explores how climate change and nature loss can be material to a financial portfolio”, said Dr. Nina Seega, director of the Centre of Sustainable Finance at CISL.
As a first step, researchers mapped nature dependencies in the banks’ loan portfolios. using the ENCORE tool.
DBS, which published a transition finance framework back in 2020, has previously recognised the financial materiality of nature loss in its disclosures. “We anticipate that the momentum on nature will develop in a similar manner to climate”, the DBS 2024 sustainability report reads.
“At DBS, we see the preservation and restoration of nature not just as an environmental and social priority, but as a risk and business imperative”, commented Helge Muenkel, DBS chief sustainability officer.
Noting that nature restoration is critical to long term economic growth, Muenkel adds, “In this context, banks have a vital role to play in addressing the nature crisis, and we see it as an extension to our climate agenda”.
Agribusiness
Southeast Asia offered researchers a unique and systemically vital geographic lens for nature risk analysis. “Southeast Asia’s economies and communities are highly dependent on nature and biodiversity”, notes UOB’s chief sustainability officer Eric Lim.
The dependency analysis found that loans to the food and agriculture sector were most vulnerable to nature loss. Across Southeast Asia, this sector accounts for 11% of GDP.
To provide bankers with a real-life example of nature dependence and credit risk, researchers conducted a pilot study of the palm oil industry.
Various hypothetical scenarios were considered including ecosystem degradation and water shortages. The outcome of interest - palm oil production in Indonesia and Malaysia. The findings helped identify where risks were higher (upstream activities) and which companies might be less vulnerable (integrated firms).
“Advancing our understanding of nature-related financial risks, starting with the food and agriculture sector, will serve us well as we support our clients in their transition by assessing emerging risks as well as harnessing opportunities for long-term value creation”, says Mike Ng, group chief sustainability officer at OCBC - Southeast Asia’s second largest financial services group and Singapore’s longest standing bank.
The three banks hope that their 18-month project makes a convincing business case for nature. For other financial institutions looking to investigate nature dependence, the report’s backers say it will serve as a template.
A template could go a long way. As far as banks assessing nature risk in credit portfolios goes, it is still early days. While the financial materiality of nature loss might be backed by a reasonable consensus, views on how that affects investment and lending decisions are still forming.
Exploratory, case-based assessments such as this one, could expedite progress by helping bankers translate the GBF into the financial lingo of actionable materiality.
