About 20% of UOB’s lending portfolio exposed to nature-related risks
The bank has, for the first time, screened its corporate lending portfolio to assess the extent of its exposure to nature’s dependencies
[SINGAPORE] Close to 20 per cent of UOB’s corporate lending portfolio have medium-to-high exposure to nature-related risks, said the lender in its 2024 sustainability report released on Friday (Mar 21).
These are mainly from loans to three sectors: building and construction; mining and quarrying; as well as agricultural production.
This is the first time South-east Asia’s third-largest lender has screened its corporate lending portfolio to assess the extent of its exposure to nature’s dependencies. It mapped its portfolio against a tool known as Encore (Exploring natural capital opportunities, risks and exposure), which was developed by the World Wide Fund for Nature.
This was part of the bank’s commitment to report disclosures aligned with the recommendations made by the Taskforce on Nature-related Financial Disclosures (TNFD). UOB was the first bank in Singapore to adopt TNFD recommendations after it was finalised in September 2023.
Through this screening exercise, UOB also found out that 60 per cent of its sustainable financing portfolio already took into account several nature elements, though some of these deals had been classified as green financing, rather than nature financing.
Speaking during a media briefing on the same day, UOB’s chief sustainability officer Eric Lim said that this shows that there is “a sizeable opportunity” to scale both climate and nature financing “to help our companies not only address climate issues, but also become much more resilient and positive in terms of nature issues”.
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Nature-related risks
The building and construction portfolio makes up the largest exposure among all three sectors. It is mainly concentrated in markets that have adaptation measures to mitigate potential physical risk such as storms, floods and landslides, noted the report.
Transition risks in Singapore are more likely to be higher than the rest of South-east Asia due to the government’s target to green 80 per cent of its buildings by 2030. Existing green building requirements already include nature criteria.
As for the mining sector – which is the second-most exposed to nature-related risks in UOB’s portfolio – the report found that upstream activities had greater exposure. This is due to its dependencies on rainfall as well as soil and sediment retention to prevent landslides, in addition to its impact on nature such as air, water and noise pollution.
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However, the sector’s risk to the bank is mitigated by the relatively intact ecosystems in which its clients operate, said the report.
Transition risks in UOB’s portfolio would come from policy changes in jurisdictions where its clients operate, and pressure from the European Union’s import regulations. The EU Battery Act, for example, requires due diligence on the environmental practices of critical mineral suppliers in the battery value chain. However, these risks are not yet material in its clients’ markets, noted the report.
UOB’s agricultural sector loan book was found to be primarily located within relatively intact systems that have sufficient capacity to manage its reliance on soil fertility, water and pollination, in addition to its impact on land use change, as well as water, air and soil quality resulting from pesticide use.
Nonetheless, there are still specific geographic hotspots across South-east Asia and China that may be more affected, though these are not expected to be widespread in its portfolio.
Transition risks for this sector are also rising due to increasing ambitions among governments in the region to tighten nature protection laws. Companies exporting to the EU market may also be affected by the bloc’s deforestation laws. But these transition risks are not yet material in the markets that UOB’s portfolio have exposure to.
While the oil and gas as well as waste management sectors were also identified to be highly exposed to nature-related risks, the bank did not focus its analysis on these two sectors due to their relatively small loan book. UOB had previously ceased the financing of upstream oil and gas activities from 2023.
Nature-financing opportunities
With a better idea of how its clients are exposed to nature-related risks, Lim said, the bank is better able to support and partner its clients in the kind of investments they want to commit to, as well as the changes they can make to their business models.
The report noted “significant business opportunities” from nature risk management, given that there are already many companies within the bank’s portfolio initiating commercial nature-focused activities. These include circular economy and waste management, sustainable water management and sustainable material selection.
“Our funding resources will be most effectively used by identifying existing nature-related activities that are scalable and financing more of them... These will be the activities with the greatest commerciality, with the widest possible adoption and highest potential impact,” said the report.
Future developments
UOB noted that it will progressively embed nature in its business and strategy by tracking its nature financing, conducting nature scenario analysis and setting nature targets when industry guidelines and data are available.
However, industry guidance on nature for financial institutions are relatively nascent. Key stakeholders have not focused on nature in a big way though discussions on this topic are picking up, said Lim.
He highlighted the need for more granular data on nature, a mechanism to translate nature-related risks into financial impact, and detailed pathways towards achieving the global biodiversity target of conserving 30 per cent of the world’s terrestrial, inland water, as well as coastal and marine areas by 2030.
“We need to get the concept of nature – being this critical part of our value chains to maintain our economies, our communities, our societies – into the language of government, into the real economy, into financiers, so that as an ecosystem, we can all come together to build the right monitoring tools, the right scenarios, the right targets,” he added.
When asked if the regulator here should mandate companies here to disclose nature-related risks and opportunities, such as the case for climate, Lim said that “the right level of disclosure” that takes into account the capabilities and resources of smaller companies would be helpful.
For nature-related financing to become more mainstream overtime, it would be important for stakeholders to learn from the issues that came up over the last few years when sustainability considerations were being integrated into financial markets, said Lim.
The environmental, social and governance momentum – which reached a fervour during the Covid-19 pandemic – is now facing setbacks as climate action has taken a backseat in the United States under President Donald Trump.
“Don’t be overly idealistic about it, but focus on pragmatic impact that create value and resilience for our economies and our communities. And I think nature will find a good platform in terms of reporting and disclosures,” he said.
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