Beyond polar bears: How nature-related financing can help companies be more resilient

Business Times

3 days ago

[SINGAPORE] A cracked, parched earth. Bare trees and withered crops. Emaciated livestock. That is often the image one has when a drought occurs. An image that is often far flung from the day-to-day realities of many people.
However, glovemakers in Malaysia felt its effects very keenly in 2014, after a water rationing exercise – a response by Selangor state to a prolonged drought – raised their costs and disrupted production.
Top Glove's chief executive officer at the time, Lim Wee Chai, said then that the company may be forced to halt production, should the situation continue.
The company subsequently invested RM15 million (S$4.6 million) to set up water treatment plants that could provide reverse osmosis to operating facilities, to reduce its reliance on municipal water.
It also implemented other measures to enhance its water resilience, such as harvesting rainwater as a sustainable water source, as well as introducing water recycling in its factories.
Glovemakers' dependency on water is an example of why there needs to be a rethink on nature's relationship with how people live and work, and how companies conduct their businesses, said UOB chief sustainability officer Eric Lim.
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'Some people may think of nature as polar bears and trees, and less of water, air, land, atmosphere – drinkable water, arable land, breathable air,' he said.
'These are the natural capital that is all around us, and essential inputs to our daily lives and business models.'
It goes back to how people and companies use water, air and land – forms of natural capital that have sustained humanity and socio-economic growth at almost zero or low cost for millennia, yet are often overlooked.
To this end, UOB published its nature strategy in March this year, as it believes it should help clients start thinking about how their business models interact with these natural ecosystem services.
It is about integrating nature into economic value chains, and not just viewing it from a restoration or conservation perspective, said UOB's Lim.
There are a few reasons why the bank has embarked on such a strategy.
First, the strain on natural capital is only going to increase, and companies will inevitably face growing demands to embed nature-related risks and opportunities in their strategy and business operations.
The sustainability sector is already seeing greater focus on natural capital. While not yet a regulatory requirement, companies and investors are already starting to pay more attention to nature-related disclosures, such as those recommended by the Taskforce on Nature-related Financial Disclosures.
Second, it would actually be costlier to replace the infrastructure capabilities that the earth's ecological assets naturally provide, if nothing is done to sustain them.
'The ability to retain soil for stable foundations, control pests, moderate temperatures – if nature can no longer do all of these things for us, we will have to build expensive infrastructure to replicate them,' said UOB's Lim.
Nature-related financing
To support companies looking to integrate nature into their business, it would be helpful to broaden the scope of nature financing.
While nature-related financing has typically been associated with conservation or restoration projects – termed as nature-positive finance – UOB's Lim said that it should also include business activities that avoid or reduce pressure on nature. These are beyond the environmental impact assessments conducted for the assets that UOB finances, as part of its responsible financing and due diligence requirements.
The Singapore Sustainable Finance Association recently published a white paper on nature financing that advocated for the same. UOB's Lim is co-lead for the association's natural capital and biodiversity workstream.
According to UOB's latest sustainability report – in which the bank outlined its nature strategy for the first time – 60 per cent of its sustainable finance portfolio already takes nature-related issues into account.
And this is just from a baseline of fulfilling current regulatory expectations on waste and water pollution, as well as the certification for green buildings by the Building and Construction Authority.
Already, the bank has in place several frameworks relating to sustainable trade finance, greening built environments as well as circular economy business models.
But there is a lot more to scale, and that is where the growth opportunity is, said Lim of UOB.
'And we're keen to continue scaling our financing towards the real-economy activities that either reduce pressure on nature or are nature-positive, and to continue to create positive impact,' he added.
Sustainable trade and sustainability-linked loans would be the UOB's main avenues to help support companies intending to pursue their own nature strategy.
In fact, Lim of UOB believes that sustainability-linked loans with nature-focused performance targets are likely to take off first, as companies show that they are increasing their effective and responsible use of natural capital.
With its strategy and products now in place, UOB is looking to engage with real-economy sectors and a broad range of stakeholders – including corporates, financiers, asset managers and regulators – to assess key natural capital issues and vulnerabilities, identify sectors for collaboration and develop an action plan for these sectors.
This entails exploring if there are regulatory levers that can be enhanced, as well as the scope of real-economy activities that companies can embark on that banks are willing to finance.
Given that Singapore is a highly urbanised city-state where ensuring food security is a priority, UOB believes the key industries that will matter to the country would be the built environment and agriculture.
One nature-related topic that can also be further developed in Singapore is water. This is especially so considering that it is another key priority for the city-state, and an issue that cuts across various types of industries.
Ultimately, integrating nature into the economy is not just about incorporating resilience into physical infrastructure; it should also be applicable to business models within and beyond the shores of Singapore.
'As changes in natural capital continue to place stress on these value chains, are our business models and the assets we own resilient and properly adapted to these changes?' said UOB's Lim.
However, while companies can try to ensure resource efficiency and circularity in their operations, it would not take off on a large-scale if governments do not create an enabling environment.
Nevertheless, nature and its related financing opportunities are still nascent, he said.
'There is a huge potential for us to continue to grow the opportunity in nature financing, as governments as well as real-economy sectors continue to become more sensitised to our reliance on nature. This therefore provides opportunities to build assets and business models that embed resilience and sustainability.'