Banks need to start managing nature-related risks: WWF-Singapore

WHILE Asia-Pacific banks generally recognise nature-related risks among their clients, the management of these risks have not been integrated into their policies and processes, according to a report by non-profit group World Wide Fund (WWF)-Singapore.

The sustainable banking report, which was released on Thursday (Jan 12), added that banks in this region also need to ready themselves for the upcoming wave of nature-risk standards, targets, and reporting.

But experts told the Business Times that a lot of hurdles still stand in the way of the region’s financial players accomplishing many of those goals.

Stark contrast

The report assessed the environmental and social integration performance of 36 banks in South-east Asia and 10 major Japanese and Korean banks. The banks were selected based on market share within their respective home markets, international footprint within Asia, as well as disclosures of sustainability-linked indicators.

The report found that, on average, Singaporean, Indonesian and Malaysian banks met at least 70 per cent of the criteria on recognising nature-related risks. This includes environmental degradation, biodiversity loss, deforestation, marine degradation, and water scarcity in their client activities.

Thai, Japanese, and Korean banks met between 50 and 60 per cent of the criteria, while Philippine and Vietnamese banks only cover between 20 and 30 per cent.

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However, there’s a stark contrast between banks’ recognition and integration of risks within their policies. Going beyond recognition of those risks and setting client expectations in managing nature-related risks would include the adoption of no-deforestation and no-conversion commitments, sustainability certification, avoidance of key biodiversity and protected areas in operations, and performing water stewardship.

The report found that, on average, Singaporean banks meet 40 per cent of the criteria for setting client expectations on nature-related risks, while other countries meet only 20 per cent of the criteria or lower.

“Biodiversity is the next frontier in sustainable finance that banks in Asia need to prepare for,” read the report.

The report made three recommendations for banks: recognise the full extent of material risks from nature loss in a country, develop an effective policy to manage them and set up processes to monitor progress.

Given that nature-related risks differ by location and are highly specific to geography, difficulties in getting relevant data to assess risks and opportunities are one of the main challenges banks face, experts told The Business Times.

Without data, it will be difficult to monitor, measure and incorporate the risks into processes, said Cherine Fok, partner at KPMG ESG.

Lee Bing Yi, director specialising in sustainability and climate change at PwC Singapore, said that banks will need access to high quality asset-level geospatial data, and understand how these data can be used to generate decision-relevant information.

“Banks will need to develop expertise to assess the dependencies and impacts of nature in their operations, financing portfolios and value chain,” he explained.

Palm oil

The report found good progress made among banks in acknowledging palm oil as a key sector, with 11 of them disclosing palm oil policies in 2022 compared with only three in 2021. However, the absolute scores for bank assessments in 2022 are still low with the leading banks in Singapore scoring only 40 per cent across 38 palm oil sub-indicators.

Banks’ palm oil policies not covering clients across the value chain and not extending coverage to client supply chains were found to be the main gaps.

The report noted that new regulations implementing deforestation-free commodities in the European Union will have an impact on Asian exporters of palm oil, and that these laws could well extend to products containing palm oil over time, impacting larger downstream sectors such as food and beverage as well as other consumer goods.

It suggested that banks require their palm oil clients commit to the “No Deforestation, No Peat and No Exploitation” policy and develop plans to get certified by the Roundtable on Sustainable Palm Oil, as well as help clients build supply chain traceability, among other recommendations.

Energy transition

While Asia-Pacific banks were found to have made progress in energy transition through developing energy sector policies and better disclosures, the report stated that the overall progress is still relatively low. Singapore banks, which performed the best among Asia-Pacific banks, scored only slightly under 50 per cent across 33 energy sub-indicators in 2022, though it was an improvement from under 40 per cent in 2021.

The report also stated that financing restrictions related to upstream oil and gas, including unconventional sources, continue to be low for the banks assessed with not much progress in 2022.

It recommended that banks prohibit financing of coal mines and coal-fired power plants, as well as oil and gas exploration, and to set science-based targets to decarbonise their energy portfolios.

However, these suggestions by WWF-Singapore are more of a call to high level goals than to actionable recommendations, said Yvonne Zhang, sustainability and climate director of Deloitte South-east Asia.

That’s because banks are trapped in a state of stasis due to conflicting green financing taxonomies between regions, exacerbated macroeconomic volatility and the disproportionate impact of increased occurrence of force majeure disasters.

“The situation in Asia requires solutions that land well on the ground, and recognition should be given to the significant progress in coal fire asset retirement that regional blended finance programmes, such as the Asian Development Bank’s Energy Transition Mechanism, has made,” she said.

Seafood

In a separate assessment involving global banks, WWF-Singapore found that the current policies in many banks are insufficient to prevent and manage their exposure to environmental and social risks in the seafood sector.

Only 20 per cent have disclosed seafood sector policies. Among those, banks’ expectations for wild-catch production clients are the most developed, while expectations for aquaculture production clients and downstream clients lack important details. Among the 25 Asia-Pacific banks, only one had publicly disclosed its seafood sector policy.

Experts noted that managing risks from the seafood value chain is highly complex, given that there are political implications due to open water jurisdiction and enforcement.

Fok said transparency through the value chain has not been a common practice due to the far reaching political and cross border nature of these issues and hence data has been limited.

Managing risks in this sector can’t be done through a checklist approach because the positive impact of environmental and social improvements is notoriously difficult to quantify in this field without robust traceability programmes, according to Zhang.

“The maritime shipping industry has made significant progress in addressing the human rights issues that may provide part of the solution to help banks extend what they already understand to cover the full range of seafood value chain issues progressively,” she added.