Disclosure on climate, forest risks needs to improve
Bank loan portfolio emissions potentially 400 times higher than direct emissions
11 Mar 2021 | The Asset

While banks have started to integrate environmental concerns into their structures and processes, there is significant progress to be made on long-term climate strategy and the financing of forest risk commodities (FRCs), according to a recent report.

The report by global environmental non-profit organization CDP is derived from the organization’s Financial Services Climate Change and Forests Pilot Questionnaire, the first disclosure framework for banks to report on climate and forest-related lending. It confirms that the banks' loan books have a vastly larger impact on the environment 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 can affect their portfolios, they are less likely to assess how their portfolios will impact the environment.

While global banks are ahead of Southeast Asian banks in many areas, the report 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 causes of forest degradation and loss globally. Only one bank participating in the pilot disclosed on their financing of FRCs.

In addition, the questionnaire’s disclosures reveal 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.

The 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, the report concludes with recommendations for banks to trigger a leap forward to sustainable economies, starting from standardized, 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. 

"The financial services sector is the missing link to sustainable economies and plays a crucial role in mitigating climate change,” says Pratima Divgi, CDP director, Hong Kong, Southeast Asia, Australia & New Zealand. “Those that are leading the transition to sustainable financing activities will gain competitive advantage and improved long-term returns. "

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