Biodiversity is next big ESG hurdle for banks, as standards and metrics are hard to define

BANKS in the Asia-Pacific have started considering biodiversity risks when making assessments for financing, but are running into some challenges with the lack of standardised frameworks.

A lack of standard metrics makes it difficult for them to accurately measure such risks and their impact on lending decisions, market players said.

Besides the absence of a unified approach to assess biodiversity risks and set key performance indicators (KPIs), one major difficulty is that such risks are, by nature, hard to quantify. This is because they tend to differ based on sector activities and location. This is also contributing to a lack of standardised tools and metrics to measure an entity’s or project’s biodiversity footprint.

“A KPI by nature is a quantitative element. Biodiversity is not quantitative, so it is extremely complex,” said Olivier Menard, Asia-Pacific head of Natixis Corporate and Investment Banking’s green and sustainable hub.

Not having direct or first-hand knowledge of the biodiversity risks associated with the borrower or transaction is the main challenge for any lender, said DBS’ head of sustainability Yulanda Chung.

While the bank relies on third-party ESG (environmental, social and governance) risk assessments to evaluate its borrowers’ loan applications, data inconsistency across different data providers is a well-known problem within the space.

In addition to difficulties in obtaining accurate data on biodiversity, there is also the need to understand the interactions between different activities and their dependency or impact on biodiversity to better assess and manage such risks, said Chng Bee Leng, head of group risk policy, as well as ESG risk and sustainability at OCBC.

Despite these challenges, some banks have started taking their first steps at incorporating biodiversity risks into their lending policies and processes. Minimally, several have started including biodiversity risks when conducting their ESG risk assessments on borrowers and projects.

OCBC, for example, expects its clients to meet local laws and industry standards on biodiversity conservation. It also does not allow the financing of projects that impact world heritage sites designated by Unesco (United Nations Educational, Scientific and Cultural Organization), as well as the Ramsar list of wetlands designated for conservation, said Chng. 

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As for Natixis, geospatial data is used to assess whether mining projects would be located at sites that are biodiversity hot spots, or whether water projects are situated in water-stressed areas, noted Menard. 

Chung said DBS’ approach is not to knowingly finance any activities that will directly or indirectly result in biodiversity impact, such as illegal logging, land clearance by burning, shark finning and the trading of endangered wildlife.

However, given the challenges in accurately obtaining nature-related data and the associated risks, there may still be unexpected biodiversity impact arising from a project that a bank is funding, which may expose it to reputational or litigation risks, despite the bank abiding by ESG risk assessment processes.

Trade-offs between reducing greenhouse gas emissions and biodiversity loss are sometimes unavoidable, given their interconnectedness.

For example, the installation of solar panel infrastructure and transmission lines may affect local wildlife, Chung pointed out.

“There is no straightforward solution to balancing action on biodiversity with more immediate social and economic needs,” she added.

To be fair, developments on the nature-related front are relatively nascent, considering that a lot more attention had been paid on the climate crisis, which has led to the earlier development of regulations, standards and tools on greenhouse gas reduction.

International efforts are underway to accelerate biodiversity conservation, especially with the establishment of a landmark biodiversity agreement to protect 30 per cent of land and water by 2030 at the conclusion of the UN biodiversity conference held at the end of last year.

The Taskforce on Nature-related Financial Disclosures is also on track to publish its final recommendations, with the recent release of its fourth and final draft – a development that could help bring about some harmonisation in biodiversity standards.

Singapore Management University associate professor of finance Liang Hao, who is also co-director of Singapore Green Finance Centre, said the developments that have taken place to reduce carbon emissions would eventually be seen for biodiversity conservation.

Nevertheless, Amanpreet Singh, deputy head of ESG finance for Asia-Pacific at MUFG, said large-scale adoption of biodiversity risk assessments by corporations will take some time in this region even though the recently-concluded convention in Montreal has provided some direction.

An important gap that needs to be closed is the ability to quantify and evaluate biodiversity risks in monetary terms, said Liang.

Banks need to know how much it would cost them if a certain proportion of their portfolio is exposed to biodiversity risks, he explained.

Lenders started paying attention to the need to keep global temperature rise to under 2 deg C by 2050 not because of a “warm heart”, but because the physical and transition risks arising from the climate crisis have an impact on their balance sheets, said Liang.

“If, at some point, banks view biodiversity risks the same way as how transition or physical risks can erode their income statement or balance sheet, they would care.”