Starting this year CDP will request information on forests and water security from financial institutions
Climate change and nature loss are intrinsically linked. We cannot solve one crisis without solving the other. The World Economic Forum estimates over half of global GDP (US$44 trillion) is potentially at risk because of businesses dependence on nature and its services. Financial institutions’ exposure to nature-related risks, and their impact on nature, come almost entirely from the activities they finance or insure in the wider economy.
Growing evidence shows nature-related risks are already impacting the financial sector. Findings by Chain Reaction Research show equity value losses of US$1.1bn between 2015 and 2019 in palm oil growers suspended over deforestation concerns. And the ratings agency S&P reported that water-related factors were amongst the reasons they revised companies’ credit ratings in 197 cases between 2015 and 2017, with most revisions being negative. Financial regulators and supervisors have started to take notice, too. In a recent series of papers, the Network for Greening the Financial System has highlighted the financial stability risks associated with biodiversity loss and is working towards addressing these risks.
It is therefore encouraging to see financial institutions increasingly turn their attention to nature-related risks and impacts by supporting initiatives such as the Taskforce on Nature-related Financial Disclosures and the Finance for Biodiversity Pledge. During COP26 where nature was high on the agenda for the first time, more than 30 financial institutions committed to stop financing agricultural commodity-driven deforestation by 2025.
On the other hand, responses to CDP’s 2021 Climate Change questionnaire revealed that while 86% of the 377 disclosing financial institutions assessed their portfolio’s exposure to climate risks, the figure dropped to around 67% for risks related to water security and to around 55% for risks related to deforestation. To address nature loss, we need all hands on deck to push nature-related initiatives forward. Institutions that ignore nature risk being left behind by the leaders.
Since 2019, CDP has taken a consultative approach to develop environmental metrics specifically for financial institutions. Alongside the launch of the first climate change questionnaire for the financial sector in 2020, CDP conducted a pilot on forests-related metrics with financial institutions and more recently a technical working group of industry participants to determine water-related metrics.
“BCA highly appreciates CDP for giving us the opportunity to participate in its 2021 climate change & forests pilot questionnaire. We have gained useful knowledge, insight as well as better understanding of climate change and forests-related issues. In line with CDP's commitment, BCA also strives to support actions that mitigate climate change and foster sustainable forest supply chains. We have a climate change strategy and roadmap this year to improve on our sustainable financial services, accelerate eco-friendly business operations, and conserve the environment.”
- Linda Chandrawati, Senior Vice President ESG, Bank Central Asia
Building on the success of the climate change questionnaire, which revealed the financial sector’s financed emissions are over 700 times greater than its operational emissions, this year CDP will begin to request information related to forests and water security from financial institutions. The disclosure framework for financial institutions will continue to be one questionnaire, as information related to forests and water is requested in a new module at the end of the climate change questionnaire. This represents one of the first steps in CDP’s ambition to move towards a more holistic, integrated questionnaire which tracks progress against not just climate, but all environmental metrics of relevance.
"Financial Institutions have an enormous impact on the state of water resources through the activities they finance. Investment in policies reflecting concerns on water sustainability, inclusion of water related metrics in an enhanced ESG due diligence exercise, and the right disclosures within the right frame will bring in greater accountability. This will ultimately ensure the importance and realization of valuing water & water security. CDP’s new questions on water security, with regards to the financial sector, will provide the right frame for disclosures, setting in accountability on valuing water and water security."
- Amit Talgeri, CRO, Axis Bank
As ever, we need organizations to disclose and reap the benefits of our tools and help trigger the normative shift required. Our questionnaire is now publicly available to view alongside reporting guidance. Companies will start to disclose via the questionnaire in April 2022, and we will reflect what we learn back to the wider investment community. In March 2022, during a public consultation, financial institutions and other stakeholders will have the opportunity to provide feedback on quantitative water-related indicators to be included in CDP’s 2023 questionnaire for the FS sector.
The message is clear. Businesses need to simultaneously transition to net zero and nature positive across their entire value chains. The financial sector has a critical role in catalyzing a shift in financial flows towards nature-positive outcomes and driving change in the real economy. Disclosure is an important step in achieving this.