The day-to-day existence of humans and the global economy are inextricably intertwined with nature. We rely on plants, animals, air, and water to sustain both life and economic activity. Yet humans and the economy have powerful, often negative, effects on our natural environment. For years, we have been damaging and depleting our stock of natural capital through excessive exploitation, pollution, and climate change — to the extent that we are now past most planetary boundaries that scientists define as safe limits for human existence on earth.
Financial institutions and investors must recognize the part they play in this relationship between economic activity and nature — their capacity to both aggravate and ameliorate nature risks and the significant financial threat nature loss poses to their investments. The unsustainable degradation of natural capital ultimately represents a serious threat to the economic models and revenue of many companies in their financial portfolios.
Amid emerging policies and regulation from various countries that attempt to both reduce negative impacts on nature and protect and restore it, we at Oliver Wyman, along with the Singapore Sustainable Finance Association, have developed the first-ever Southeast Asian industry report, "Financing our Natural Capital," on integrating natural capital into financial institutions’ decision frameworks.
Assessing the materiality of nature risks in Southeast Asian economies
The first step for financial institutions toward integrating natural capital is to better understand the materiality of nature risks to their portfolios. In our analysis, we utilized Southeast Asia's gross domestic product (GDP) data to illustrate how financial institutions can conduct an impacts and dependencies assessment on their own portfolio to understand nature risk materiality.
Our analysis suggests several sectors of economic importance in Southeast Asia have large impacts and/or dependencies on nature. They are namely agriculture, mining, manufacturing, and real estate. Banks and investors in these sectors in the region may face material nature-related risks.
The next step is for financial institutions to examine specific areas of risk (which are often hyper-local, such as local analysis of ecosystem integrity by geography), the specific practices and mitigants of companies they invest in or lend to, and the policy environments in which these companies operate. The inclusion of value chain considerations should also be explored, as impacts and dependencies will vary across the value chain.
The importance of value chain considerations can be seen in how poultry farming has very different impacts and dependencies from palm oil production, although both fall under the agricultural umbrella. In a similar vein, oil palm farmers face different impacts and dependencies from palm oil refineries.
Exploring opportunities for nature-positive financing beyond the risks
The risks posed to nature also come with opportunities for financial institutions to finance nature-positive technologies and help slow and even reverse nature loss. This investment opportunity is currently not well-recognized, partly because definitions of what is nature-positive may be too theoretical or focused on niche, non-viable investments. We believe banks are more likely to generate investment activities if they take a broad view of nature-positive activity, encompassing a wider range of opportunities — such as green building development, regenerative agriculture, water efficiency improvements, pollution reduction, and waste management.
The weight of the financial services sector can effectively accelerate nature-positive technological innovations with the potential to create business opportunities. Given the urgency of the threat to nature, banks and financial institutions need to begin now to increase their proactivity in nature-positive financing. That means understanding the materiality of nature risks and opportunities, embedding these considerations in internal processes, and pursuing new business opportunities. In doing so, financial institutions will both address nature degradation in the real economy and grow their businesses.
Engaging policymakers and non-financial industry players into the decision-making
Additionally, policymakers, financial regulators, and real economy players have roles to play. For policies, we advocate efforts toward a national regulatory agenda for nature conservation and restoration. This should be anchored in expectations for economic sectors, with guidance by financial regulators for financial actors. The development of local nature risk scenarios (a requirement for the quantification of nature risk) and sectoral pathways (needed for further target setting) should complement that guidance.
At the industry level, we recommend collaborations between the financial services sector and nonfinancial industrial players. Industrial sectors with high impact or dependency on nature will especially require financing, and both sides must work on unlocking barriers to this. Collaboration should also include standardizing data reporting and metrics around nature financing, along with creating best practices and shared methodologies — all of which can enable the scaling up and reporting of nature financing efforts.
