The World Wide Fund for Nature (WWF) is urging Asian central banks and other financial regulators to take coordinated action to mitigate the risks to biodiversity arising from investment decisions, in particular by promoting more transparent disclosure of data linked to these risks.
Biodiversity loss poses risks to a broad range of economic activities because of the resulting reduction in the quantity and quality of nature, including land, water and forest. Sectors it affects include agriculture, commodities, consumer goods, clothing, and electric utilities, the WWF report noted.
These risks threaten negative impacts on economies by reducing productivity, causing price fluctuations and capital depreciation. These in turn will increase credit, liquidity, reputation, and operational risks.
For example, India’s businesses facing a growing risk from the depletion in the country’s water supply. This could mean significant losses for the country’s banks, as close to 40% of their gross credit exposure is in sectors where water risks are large.
Central banks and financial institutions across the world damage biodiversity through their lending and investments, with the former in particular increasingly participating in financial markets through unconventional monetary policies, the report added.
Central banks have roughly one-third of global assets under management on their balance sheets, according to Boston Consulting Group data from 2020. The US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have added another $4 trillion since the coronavirus pandemic began.
However, the market currently does not perceive biodiversity impact as a material risk and, as a result, market players hold assets with high biodiversity impacts in their portfolios.
Since the pandemic began, roughly 10% of the corporate bonds the Federal Reserve has bought were issued by companies at high risk of adversely affecting biodiversity, according to Vivid Economics & Finance for Biodiversity Initiative’s 2021 data.
In Europe, the practice is more coordinated, with specific rules and standards to identify economic activities with environmental risks. This includes taxonomy and financial disclosure, through the network for greening the financial system, the European sustainable finance strategy and the European taxonomy to define sustainable investments, noted Maud Abdelli, Initiative Lead of WWF’s Greening Financial Regulation.
“If Asian countries want to meet the net-zero goal in 2050 or 2060, the key is to do it in a coordinated approach, in setting up standards and agendas,” Abdelli told AsianInvestor.
To ensure an economy is becoming more ESG-friendly, central banks and financial regulators should strengthen regulation and disclosure of data, to ensure more transparent investment activities in both public and private sectors, she said.
WWF has seen many central banks and financial supervisors in Southeast Asia countries make progress in integrating ESG into their policies, Abdelli said, though she declined to comment on any specific country’s ESG performance
Dong Chen, senior Asia economist at Pictet Wealth Management, noted that major Asian central banks’ standards on ESG are inconsistent, such as the actual goal to reduce greenhouse gases, and whether coal-related economic activities can be environmentally friendly.
“Each Asian country has a different agenda and they are relatively in an early stage [compared to Europe],” Chen told AsianInvestor.
He stressed the crucial role large economies like China can play in the region. “If China can live up to its promise to achieve carbon neutrality in 2060, it will have contributed a lot to the world (among Asian countries),” he said, noting that China accounts for nearly one-third of the world’s carbon dioxide (CO2) emissions, according to 2019 data.
Carlos Casanova, a senior economist for Asia with Union Bancaire Privée, agrees that unified standards are crucial, but he thinks a company or bank’s carbon footprint is much simpler to quantify than other aspects of sustainability such as biodiversity.
“Sometimes you don't have something like CO2 (carbon dioxide) as a common denominator. You don't have a thing that is easy to quantify that you can use to measure, so it becomes a lot more subjective and a lot more difficult to implement,” Casanova told AsianInvestor.
“Central banks and financial supervisors have built up significant expertise to start addressing climate-related risks. They must now leverage this capacity to scale up their engagement and include further interrelated environmental dimensions into their decision-making” said Chiara Colesanti, fellow at the Council on Economic Policies.