Banks in emerging markets allocate around half – and in some cases much more – of their credit portfolio to businesses highly dependent on ecosystem services, exposing them to significant risks from nature and biodiversity loss, according to the World Bank.

In a policy research paper released this week, the World Bank sought to measure the exposure to nature and biodiversity loss of the banking systems in 20 emerging markets, based on publicly available information on their lending portfolios.

Not surprisingly it found that the lower the income, the higher the exposure to nature loss, though the overall level of around 50% of portfolios was significant.

“In lower-middle-income economies, banks allocate on average 55% of the loans to firms subject to potential financial losses due to a deterioration of ecosystem services,” the paper found.

The category was led by Mauritius, where banks had nature risks attached to 73% of loans, followed by Pakistan (60%), and Indonesia (52%).

Upper-middle-income came out with an average rate of 47%, which ranged from 56% for Argentina to 43% in Russia, while high-income countries stood at 45% on average – Hungary recording the highest dependency with 52% versus Chile at the low end with 37%.

The analysts also found that 60% of banks’ involvement with businesses exposed to nature and biodiversity dependencies were limited to just six sectors, led by construction and real estate at 20%.

The others included crop and animal production, wholesale and retail trade, manufacturing of food products, and electricity, gas, and other utilities.

“Furthermore, the highest dependencies on ecosystem services across countries tend to be on climate regulation and flood and storm protection, indicating the interconnectedness of climate change and nature loss,” the report said.

While showing the degree to which emerging market banking systems is exposed to risks related to nature and biodiversity loss, the World Bank analysts warned against attempting to reduce this dependency level, as that might be prone to failure given how embedded nature is in these economies.

“The objective should rather be to induce a transformative shift from nature extracting and harming economic activities towards nature-positive activities and production processes,” the paper said.

“For instance, intensive agriculture can have detrimental impacts on soil, biodiversity and terrestrial and maritime habitats. In contrast, more sustainable agricultural practices might be able to reduce those negative impacts. However, both types of agriculture, intensive and sustainable ones, would still remain highly dependent on nature.”

Focus instead should be on reducing the negative impact on nature, according to the analysts, such as through providing incentives and financial instruments for nature restoration, implementation of nature-based solutions, payment for ecosystem services, environmental tax reforms, or phasing out subsidies that are harmful for nature, according to the World Bank.

By Stian Reklev – stian@carbon-pulse.com

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