How APAC Financial Institutions Can Meet Market Expectations on Nature

In the countdown to the TNFD framework launch, the region’s financial sector is still a long way from including nature risk in business decisions.

In the next few weeks, the Taskforce on Nature-related Financial Disclosures (TNFD) will release the world’s cornerstone framework for nature risk assessment. Investors, and other stakeholders, expect its immediate use to provide comfort that financial institutions are identifying and managing biodiversity risks.

The region’s financial services sector is nowhere near ready for this moment.

A UN Financial Market Readiness assessment found that embedding nature-related practices in decision-making is still limited to “early movers”. WWF-Singapore’s 2022 Sustainable Banking Assessment, covering ASEAN, Korean and Japanese banks, found that half of the banks assessed had made little progress since 2021.

Understand the complexity of biodiversity risk assessment

Financial institutions are still struggling to incorporate climate data in their lending, investment and underwriting decisions. They have yet to start on nature risk — even though biodiversity and climate are strongly intertwined. Forests and ecosystems, such as mangroves, marshes, and coral reefs, are crucial carbon sinks necessary to counteract the impacts of global warming. It’s almost impossible to assess climate risk without taking into account nature loss.

However, as many financial services institutions pilot testing the TNFD’s framework in Asia-Pacific have found, introducing nature considerations to risk frameworks is challenging.

The importance of the task was clear. As one participant commented, “This issue is as urgent as climate change because biodiversity loss is happening now, and the issues are all interlinked. On a shorter timeframe, we’re already at the planetary boundary for the earth system.”

But, as the testing teams discovered, accounting for biodiversity risk is far more complex and data-intensive than accounting for climate risk. The multiple challenges include:

  • No single metric. While it is relatively simple to calculate carbon emissions, measuring biodiversity is hugely complex and multi-faceted. We can calculate the value of pollinators to agriculture or ongoing clean river flows to a chemical manufacturer. But how do we assess the worth of an entire ecosystem in a wetland, a rainforest or even a city park? Biodiversity will play out differently across every organization. The TNFD framework will help institutions to measure nature risk, but the pilot testing teams noted that it does not offer the same precise level of guidance found in the TCFD.
  • No black and white answers. Climate risk has relatively clear rules: carbon emissions are bad. Nature risk is far less cut and dried. As one participant explained, “The cause and effect might be geographically separate. You finance a clothes manufacturer near the source of a river, but the ecosystem that is impacted might be where the river meets the sea and that can be thousands of kilometers away. That’s really hard to get a handle on and it’s a huge challenge, particularly if organizations look at this holistically, across the entire balance sheet.”
  • The notion of dependency. Calculating nature risk isn’t just about avoiding ecosystem destruction, in the way that climate risk is about avoiding carbon emissions. Nature risk assessment also focuses on understanding how a business depends on the ecosystem services provided free by nature, including clean water and air, pollination, soil fertility or carbon sequestration.

Start building nature risk capabilities now

As documented in the report, TNFD – making it real. A guide for financial institutions to get started on the TNFD, the testing experience made clear that to use the framework, many institutions in Asia-Pacific need to rapidly accelerate their biodiversity risk assessment capabilities.

As the report explains, institutions can take a staged approach to begin developing nature risk assessment capabilities. This will start with:

  • Raising awareness and educating internally about nature risk, upskilling management and teams across the business.
  • Identifying material exposure in portfolios, using a heatmap to understand priority business lines, financial products, material sectors and locations.
  • Engaging with companies and suppliers to address their biodiversity impacts and risks.

Institutions trying to “fix climate” before they address nature are missing out on an important opportunity. To get ahead of the pack, banks, insurers, and asset managers should work through nature risk now, at the same time as climate risk – building both into their mainstream risk management processes.

This will prevent duplication, accelerate change, and enable institutions to assess nature risk and provide biodiversity data to meet the expectations of investors and regulators.

Financial institutions must rapidly develop the ability to systematically consider nature-related risks and opportunities in their business strategies and asset allocation processes. As a testing participant noted, “You’re looking at the double materiality effect here. How can you show biodiversity impact on your balance sheet? But also, how do you impact biodiversity?”

Wolfram Hedrich is EY’s Asia-Pacific Financial Services Sustainable Finance Leader. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.

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