10th March 2021 – The world’s forests are critical in fighting climate change, contributing up to one-third of the mitigation needed to limit the global temperature rise to 1.5 ˚Celsius. Amongst a host of ecosystem services they provide, forests also form a buffer to reduce the risk of zoonotic diseases spill over. Considering the current Covid-19 pandemic, the need to protect and restore the world’s forests has never been clearer.
Global environmental non-profit CDP unveiled the findings of their Financial Services Climate Change and Forests Pilot Questionnaire: the very first structured, self-reported disclosure framework for banks to report on climate and forest lending. The report was launched at a virtual webinar moderated by Corrado Forcellati, Sustainability Services Director, KPMG Singapore with panellists Rizal Mohamed Ali, Responsible Investment Vice President, KWAP; Felia Salim, Director, &Green Fund and Meixi Gan, Sustainability Deputy Director, Singapore Institute of International Affairs.
Key findings from these unique disclosures highlight that whilst banks have started to integrate environmental concerns into their structures and processes, there is significant progress to be made on long-term strategy and financing of FRCs. The results also confirmed that banks’ loan books have a vastly larger impact than their operations, with portfolio emissions potentially some 400 times higher than direct emissions.
Although the participating banks can describe their environmental risks well, their responses suggest they are currently more focused on one side of the ‘double materiality approach’. This means that while banks generally assess how environmental issues could affect their portfolios; they are less likely to assess how their portfolios would impact the environment.
While global banks are ahead of Southeast Asian banks in many areas, CDP notes that disclosure on forests must improve overall, especially relating to the financing of FRCs like timber, palm oil, cattle and soy — which are the largest cause of forests degradation and loss globally. Only one bank participating in the pilot disclosed on their financing of FRCs. Banks can demonstrate that their financing of FRCs is sustainable by increasing transparency.
In addition, the disclosures revealed great opportunities for banks in financing the transition to a low-carbon, forest-positive future. The potential financial impacts of environmental opportunities disclosed outweigh the potential impacts of risks disclosed, as well as the anticipated costs to achieve those opportunities.
One area of opportunity highlighted by almost all banks was providing financing to agricultural smallholders. Despite their significance in palm oil and rubber production, a lack of access to credit for smallholder producers is driving behaviours that result in forest loss and increased emissions. The smallholder financing and other engagement approaches disclosed by the banks represent opportunities to advance not only the environmental aspect of sustainability, but also the social aspect.
CDP’s report recognises the financial services sector is crucial in achieving the transition to a low-carbon and forest-positive economy. The influence of financial services companies extends far beyond their immediate operations to enable activities in the wider economy, which places them in a unique position to catalyze change by engaging with the companies they lend to, invest in and insure.
To this end, CDP concludes with recommendations for banks to trigger a leap forward to sustainable economies, starting from standardised, tailored disclosure of their impacts as the key first step. Other recommendations include:
- implementing board-level oversight across environmental issues;
- ensuring time horizons, assessments and processes around environmental issues are of a long-term nature;
- strengthening reporting frameworks and fully disclosing lending practices;
- considering the interconnectivity of forests with climate change, water and the natural world to properly assess risks, opportunities, and impacts.
Pratima Divgi, Director, Hong Kong, Southeast Asia, Australia & New Zealand at CDP commented: “The financial services sector is the missing link to sustainable economies and plays a crucial role in mitigating climate change, driving the next evolution in CDP disclosure: pioneering forest-related indicators specifically for banks. Those that are leading the transition to sustainable financing activities will gain competitive advantage and improved long-term returns. CDP is a key partner in the journey toward corporate responsibility and disclosure is a positive first step to achieving a sustainable future for people and planet.”
Over the coming years, CDP will develop the financial services questionnaire to expand reporting globally to investors and insurers and integrate a comprehensive range of environmental themes.