The lending habits of Australia’s banks are contributing to the destruction of nature, particularly in high-impact sectors such as agriculture, property, energy, and resources, according to a report released Monday.

While previous reports have spotlighted the banking sector’s investment in fossil fuel projects, Monday’s report by consultants EY, commissioned by the Australian Conservation Foundation (ACF), focussed on the sectors it invested in that had a high impact on nature.

“As providers of critical funding to these sectors, banks have the opportunity to help shape the landscape and improve nature-related outcomes through their influence and leverage capabilities,” the report said.

The most material way banks can impact upon nature is through their value chain and activities of the companies that they finance, the report highlighted.

It found that 22%, or A$260 billion ($165 bln), of all bank lending went to these four sectors, and highlighted where the banks were exposed to nature-related risk.

An analysis of the 2022 annual reports and financial statements of Australia’s four largest banks also found that collectively, there is roughly A$167 bln in outstanding loans and advances to the key sectors driving impacts on nature in Australia.

It said out of the four so-called “impact sectors”, the most significant amount of lending goes to livestock agriculture, where historic valuation practices that assume nature has no value are driving broadscale land-clearing.

The beef industry, it said, was particularly exposed, given its high dependency and impact on nature, and because some A$118 bln of all lending finance flowed to the agriculture sector as of June 2023.

ACF corporate campaigner Jonathan Moylan noted that farmers who promote the long-term resilience of their farms and landscape – such as by retaining biodiversity corridors, planting shelter belts, and fencing off creeks – were not being rewarded by legacy valuation methods.

He said this was because the vegetated land is considered to have less worth, despite the ecosystem services nature provides.

“This has led to a situation where property developers are incentivised to buy land, clear it, and sell it at a much higher price, causing long-term damage to biodiversity and agricultural productivity,” Moylan said.

“By recognising the value of nature in land valuation, banks can remove this perverse incentive and reduce the trade-offs for farmers who are trying to do the right thing.”

Roughly 41% Australia’s forests have been cleared, primarily for agriculture, the report found.

REAL ESTATE

Property was the second-largest sector that was leaving banks exposed, with some A$65 bln of all lending finance attributable to the property construction and development sector as of June 2023.

EY found that up to 13.2% of Australia’s native vegetation has been replaced by urban production and extractive uses of land.

Some A$23 bln of all lending finance is attributable to the resources sector, and A$54 bln to the energy sector, both of which can materially contribute to the degradation of nature through habitat loss, and increases in GHG emissions, respectively.

The report highlighted that historically, banking practices had little consideration of nature-related impacts and dependencies through environmental risk assessment policies.

However, it said they were beginning to recognise that investing in nature regeneration was a critical component of prudent financial management, as well as in response to increased expectations to incorporate broader nature considerations into their practices.

“Nature and biodiversity risks are increasingly becoming part of the risk landscape for finance, as global commitments consolidate and national regulatory settings tighten,” Emma Herd, Australia climate change and sustainability partner at EY, said in a statement.

“There are also significant opportunities for banks, which act now to establish strong approaches to nature risk management and work with their clients to deliver rich biodiversity outcomes for Australia.”

BARRIERS AND OPPORTUNITIES

EY and ACF’s report raised a number of key barriers and opportunities for Australian banks to align themselves with the goals and targets of the Global Biodiversity Framework.

Obstacles included a lack of nature-related policies and target setting, limited visibility of nature-related risks in their governance and risk management processes, operational data and technology gaps, and the aforementioned legacy valuation frameworks failing to consider the value of environmental assets and ecosystem services.

Opportunities included implementing science-based nature targets and policies, enhancing governance, and improved land valuation by accounting for ecosystem services among others.

The report said frameworks like the Taskforce for Nature-related Financial Disclosures (TNFD) provide a platform for companies and banks to develop an integrated approach to managing nature-related risks and opportunities.

Additionally, it urged banks to actively engage with environmental law reform in Australia, and collaborate with customers to build capacity, collect existing data, and encourage the reporting of nature-related analytics.

On Monday, the federal government held its first “lock up” style meeting with stakeholders who were given access to the draft reforms of the country’s Environmental Protection and Biodiversity Conservation Act.

The EY report said national standards in a reformed EPBC Act could support better environmental protection and compliance outcomes associated with banking due diligence processes.

By Mark Tilly – mark@carbon-pulse.com

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