Nature-related financial risks: The next risk frontier in Asia-Pacific

FOLLOWING this year’s United Nations climate conference, world leaders are paying increasing attention to another environmental topic: nature loss and its impact on our economies. Science is showing us how climate change and nature loss are highly connected. Climate change and nature loss create a vicious circle, where one intensifies the other. Solve both, or neither, as the Intergovernmental Panel on Biodiversity and Ecosystem Services (IPBES) has declared.

As humans, we rely on nature for many things from food and water, to regulating climate and diseases, providing us opportunities for recreation to enhance our well-being, and many more. Through our economic activities, humanity has caused the loss of 83 per cent of all wild mammals and half of all plants. The current rate of extinction is tens to hundreds of times higher than the average over the past 10 million years – and it is accelerating.

At the epicentre of the global nature crisis is the Asia-Pacific region, home to nearly half of the world’s biodiversity hotspots.

Temasek has estimated that 63 per cent of the region’s gross domestic product (GDP) – US$19 trillion – is at risk from nature loss, a higher share than the global average. This is not unique to our region. Every economy, including businesses and societies within, all rely on natural resources and the services it provides. The World Economic Forum estimates that over half of the world’s total GDP is highly or moderately dependent on nature and its services.

Nature-related risks in Asia-Pacific

Asia-Pacific countries have significant economic contributions from sectors highly dependent on nature. High dependence on nature would also mean high vulnerability to decline, leading to disruption of the sector’s production processes. For example, soil erosion has substantial implications for land productivity as healthy soil is the foundation for agriculture and is vital for the provision of food, feed, fibre and clean water. However, with increasing expansion of croplands, there has been an increase of global soil erosion, as a paper published in Nature concluded, with one of the greatest increases predicted to occur in South-east Asia among others.

However, it’s not just about dependence; the impact of, for example, bad environmental management or practices in a particular sector, could also pose a material risk to businesses. For example, a recent study has shown that the expansion of oil palm and rubber plantations across watershed areas in Sumatra has increased the frequency and intensity of floods impacting nearby communities.

Even secondary and tertiary industries such as tourism and consumer goods are affected as they rely heavily on nature through their global supply chains.

According to the Living Planet Report 2022, the Asia-Pacific region shows a near continuous decline in biodiversity between 1970 and 2018, with an average decline in monitored populations of 55 per cent. Factoring nature-related risks into decision-making can help companies and financial institutions lower nature-risks scenarios, create stronger growth opportunities, and increase market share.

In the New Nature Economy: Asia’s Next Wave study authored by Temasek in collaboration with the World Economic Forum, three systems that drive most of the business-related threats to nature in Asia-Pacific are cited: food, land and ocean use system; infrastructure and built environment; and energy and extractives system. Understanding exposure to these key sectors can help businesses and financial institutions (FIs) recognise the potential financial risks.

Role of financial institutions

FIs in Singapore, a global financial hub, have a vital role to play in leading the shift towards nature-positive economies, as do FIs in the broader Asia-Pacific region. However, progress in integrating nature-related considerations within FIs is still nascent. WWF-Singapore’s 2022 RESPOND report on asset managers found that only five Asian asset managers have a policy or statement on deforestation and biodiversity loss. The report also found that development banks in Asia-Pacific typically take heed of environmental and social risks associated with climate change, but acknowledgement of biodiversity risks remains limited.

In looking into the integration of environmental and social considerations in 47 major banks across Asean, Japan and Korea, we encouraged banks to include nature-related risks in their sustainability strategies. Our recommendations from the report included:

• Recognising nature-related risks such as biodiversity loss, water scarcity and marine environment degradation;
• Incorporating nature-related risks into client requirements for environmentally and socially sensitive sectors;
• Developing capabilities to measure nature-related risks at portfolio level, similar to climate-related risks;
• Incorporating nature-related transition plans into the overall sustainability strategy.

The Network for Greening Financial Systems (NGFS) – currently headed by Ravi Menon, managing director of the Monetary Authority of Singapore – has stated that it will take into account nature-related financial risks across its work, aiming to equip central banks and supervisors with a common base of knowledge of nature-related risks. The Singapore Exchange (SGX) has joined the Taskforce on Nature-related Financial Disclosures (TNFD) to develop a global disclosure framework for reporting on nature-related risks and opportunities.

FIs have a large role in moving the needle and addressing nature-related risk that our economies face from mobilising finance towards sustainable activities to investing and supporting technological innovations.

The Asia Sustainable Finance Initiative (ASFI) Academy is a suite of e-learning courses developed by WWF-Singapore and its ASFI partners, designed for finance professionals looking to build their sustainable finance expertise. A course on nature-related risks, covering topics such as understanding the role of natural capital, ecosystem services and biodiversity for people, businesses and economies, examining how businesses and the economy both impact and depend upon nature and biodiversity, and understanding how this translates into risk and opportunities for FIs, will launch in 2023. This will provide finance professionals with a fundamental understanding and equip them to better manage future risks related to nature and biodiversity.

How can businesses and FIs act now?

Recognising risk within organisations is a crucial first step that includes building internal capacity to understand nature-related risks to developing risk management policy to manage these risks, supporting initiatives on the topic and understanding the impact and dependency of the sectors you are exposed to.

Nature is deteriorating faster than at any time in human history and the drivers of these losses are intensifying. Continuing this path presents extreme risk and uncertainty for our economies, financial systems and society. We simply cannot do the same for nature, and the time to act is now.

The writers are from WWF-Singapore. Achal Agarwal is chairman; Pina Saphira, assistant vice-president of Asia Sustainable Finance.