DBS OCBC UOB Release Nature Risk Finance Report

In a milestone decision that marks increasing momentum towards mainstreaming nature-related issues into the financial system, Singapore's top banks—DBS, OCBC, and UOB—have collectively released a landmark report to measure nature-related financial risks. This pioneering report, funded by the Monetary Authority of Singapore (MAS) and developed in collaboration with the University of Cambridge Institute for Sustainability Leadership (CISL), is the first of its kind industry initiative in Asia to address biodiversity and loss of ecosystem and their relationship with credit risk in the banking sector.

The "Building capacity to identify and assess nature-related financial risks" report is the culmination of an 18-month research effort to assist financial institutions in better understanding and measuring risks posed by loss of nature and climate-driven changes in ecosystems. It focuses on how nature-related impacts—loss of biodiversity, water scarcity, and climate change—affect the financial health of business and the soundness of banks' loan portfolios. Its emphasis is placed mostly on Southeast Asia's food industry and agriculture, and palm oil was chosen as the pilot industry to study in greater depth because of its economic value and sensitivity to environmental factors.

This research was born from an urgent gap in the finance world: there were no well-structured frameworks and data available for quantifying nature-based risks at a local level. In contrast to climate risks, which are becoming more and more effectively embedded in financial choices through climate stress testing and carbon disclosure, nature-related risks are still inadequately quantified and under examined, yet extremely pertinent. The report calculates that more than 50% of global GDP worth some USD 58 trillion is directly reliant on natural ecosystems in good condition. Disruption of these systems may thus have significant financial repercussions.

The pilot study analyzes the exposure of the palm oil sector to environmental threats. It shows how upstream firms—those engaged in raw material production and first-stage processing—are more exposed to credit risk and business risk than vertically integrated businesses that take over the supply chain from plantation to distribution of the final product. Such exposure is motivated by such drivers as climatic uncertainty, drought, deforestation, and soil degradation, which impair productivity and increase costs. But firms which were more fiscally robust and possessed superior sustainability mechanisms fared better under such shocks.

In her capacity as MAS's Chief Sustainability Officer, Gillian Tan put the study in context as an important contribution to the development of the financial industry's capability to mainstream nature-based risk considerations in lending and business. She underscored the need for consideration of the local context in the assessment of risks, which she accentuated is location-specific and needs to be addressed via a localized lens. This is particularly demanded of Southeast Asia, a region that is highly biodiverse but becoming more and more vulnerable to environmental degradation and resource depletion.

The three banks' leaders supported the call for action and further integration of nature thinking into mainstream finance. DBS Chief Sustainability Officer Helge Muenkel emphasized the inherent link between natural capital and long-term economic and human prosperity. From his perspective, nature conservation should not only be seen as a green mandate but a business imperative imperative to facilitate inclusive growth and resilience in finance.

Mike Ng, OCBC's Group Chief Sustainability Officer, seconded this perspective by emphasizing the importance of building insights into nature-related financial risks to allow clients to thrive in their sustainability transformation. He said that identifying emerging risks and opportunities for long-term value creation early were critical processes to future-proof businesses.

Eric Lim, UOB Chief Sustainability Officer, emphasized the urgency of starting early discourses on biodiversity and economic growth. He supplemented that Southeast Asia's reliance on nature necessitates action collectively in developing solutions that enhance inclusive growth as well as guarded ecosystems for generations to come.

The report insists that although this first try is a good beginning, more has to be done to bring nature-risk assessment into mainstream financial institutions. It calls for enhanced access to good quality, locally available environmental information, additional sector-specific vulnerability analysis, and greater cooperation between financial institutions, regulators, academia, and civil society. This is for the purpose of creating standardized methodologies that can be used to inform credit decisions, minimize systemic risk, and keep the financial system resilient in the context of increased ecological change.

Dr. Nina Seega, CISL Director, highlighted the need for ongoing capacity-building in the financial sector. She stressed that understanding and management of the "climate-nature nexus" is necessary both from an environmental and financial systems' stability and longevity point of view.

Finally, DBS, OCBC, and UOB's joint report is the new standard for Asia's financial sector to report on nature-risk. It's an eye-opener and a template for banks, investors, and regulators who want to integrate environmental resilience into their very operations in this era of increasing ecological risk.