Asia has led the global economy through the 21st century and Asian development banks must now do the same for the economy’s relationship with nature. This is necessary to save biodiversity at large, including the region’s last remaining intact forests, but it will also protect banks’ balance sheets given new analysis showing they are endangering nature more than in any other region.
Globally, there are more than 450 development finance institutions (DFIs), which invest about US$2.3 trillion annually. Almost all are accountable to one or several governments, and ultimately to their citizens. As such their core purpose is to facilitate sustainable development.
Sustainable development is inextricably linked to nature because of the benefits it provides for people and businesses, from sustaining our air, water and soils, to providing pollination and pest control. However, biodiversity is declining at an unprecedented rate and the drivers of these losses are intensifying.
To coincide with last month’s Finance in Common Summit, the first time all DFIs convened globally, we analysed how development banks account for nature in their lending activities, in research funded by the thinktank Finance for Biodiversity (F4B).
We measured the extent to which DFIs were endangering nature and how dependent they were on biodiversity that is in decline. These nature impacts and dependencies are two sides of the same coin: one firm’s damage to nature can lead to financial loss for another dependent on that nature, a feedback loop which shows why biodiversity risk can be a leading indicator of material financial risk.
We found that DFIs in Asia ranked top of both types of risks. More than any other region in the world, DFIs in Asia depend on vulnerable biodiversity and, at the same time, are putting more nature at risk through their financing.
Deforestation and water scarcity
Our analysis was the first attempt to value a bank’s impact on nature. We calculated that DFI investments in Asia were endangering nature worth US$540 billion annually, half the global total. Two key components of this nature at risk were deforestation and water scarcity, especially in Southeast Asia and Central Asia respectively. In Southeast Asia, in countries including Indonesia, Vietnam, Laos and Cambodia, the main problem is deforestation, with agriculture the main driver. The region is home to the most valuable forests in Asia, for both climate and biodiversity, placing a particularly high price on this damage.
Our analysis suggests that DFI lending in Laos and Cambodia may be linked to as much as 3-4% of total annual deforestation in these countries. This is unacceptable, given the core mandate of these banks is to promote sustainable development.
In Central Asia, we found water consumption to be the dominant impact on nature. Our analysis suggests that the environmental impacts of water use are considerably higher in Asia than in any other region, largely because it is scarce. Data suggest that the environmental cost of water use in Asia is equivalent to about two thirds of water tariffs, suggesting water is worryingly under-priced.
If an energy utility or farm, for example, excessively consumes water in areas that are already struggling to meet local needs, the environment can feel the bite. As water becomes more limited, so does the ability of natural ecosystems to support diversity in vegetation and plant life. Again, agriculture is the most significant sector, accounting for nearly three quarters of water use in Asia, with the remaining balance largely down to utilities.
Turning to the second type of biodiversity risk, we found that Asian DFIs were also more dependent on vulnerable ecosystems than those in any other region.
The main culprit for this higher “dependency risk” was weaker environmental regulation. This makes more likely the depletion of vital natural resources, from reliable water to pollinating insects, and as a result businesses face falling revenues or higher costs. We found that Asia ranks marginally below Africa in terms of quality of regulation. Europe has the best regulation followed by the Americas.
Banks can reduce biodiversity risks
On 12 November, at the end of the Finance in Common Summit, all 451 public development banks jointly committed “to manage direct and indirect climate, biodiversity, environmental […] risks and opportunities”.
DFIs can put these risks behind them to make their lending more resilient and stop the harm to vulnerable ecosystems. Opportunities to do so are burgeoning as public and private banks and other financial institutions awake to the long-term trend of sustainable growth.
Asian DFIs must commit to conducting biodiversity-related stress tests of their balance sheets. Right now, these risks go largely unchecked. They endanger nature, undermine sustainable development, and have the potential to develop into material financial risks. We need a systematic change in the way DFIs operationally measure, manage and report this risk.
With the private sector looking for leadership, now is the time for the DFI community to step up and lead systemic change. Under the Finance for Biodiversity Pledge, 26 financial institutions representing over €3 trillion including AXA and HSBC, committed to assess the impact of their financing operations on biodiversity, to set targets, and to report progress publicly. More than 30 financial institutions support and are actively contributing to the emerging Taskforce for Nature-related Financial Disclosures (TNFD), expected to launch in 2021. Yet nature is new for the private sector and it doesn’t have the systems in place to manage these biodiversity risks.
Key Asia DFIs such as the China Development Bank, the Export-Import Bank of China and the Asian Development Bank, can position themselves at the forefront of this trend. By contributing systems and infrastructure that private institutions can adopt, the DFI community can lead the private sector and in this way reorient lending, and put Asia, on a greener, safer path.