African banks could face a 21% increase in credit losses by 2050 unless companies in highly-exposed sectors, including agriculture and mining, urgently address their risks and dependencies on nature and shift to more sustainable practices, a report has said.
Consultancy firm McKinsey and British development agency FSD Africa teamed up with the African Natural Capital Alliance (ANCA) to carry out a stress test on the banking systems in five African countries – Ghana, Mauritius, Morocco, Rwanda, and Zambia – flagging the grave consequences of corporate inaction on nature.
The report examined the potential impact of biodiversity loss on companies’ profits across a number of sectors, with agriculture, mining, forestry, construction, food and beverage, and electricity, gas, and water among those most at risk.
It showed how this is bound to affect major lenders in the region depending on different scenarios – a disorderly transition, where businesses fail to reduce their negative impacts on nature, and an orderly transition.
“[Under the first scenario], cumulative expected credit losses could increase by up to 21% by 2050 in some banking systems, with much higher impacts for individual sectors,” said the report.
“Profit losses due to nature-related risks in the most-affected sectors could be similar in magnitude to profit losses due to climate-related risks for emissions-intensive sectors.”
By 2050, annual profit losses associated with nature-related risks could reach 50% and 32% in the agriculture and mining sectors, respectively, mainly due to reduced demand for non-sustainable products and increased costs.
CORPORATE IMPACTS
For example, mining companies could face challenges in securing contracts to open mines in environmentally sensitive sites, which could result in disruptions to production and lost revenue.
As well, efforts to prevent deforestation and protect highly biodiverse areas at regional and global levels could constrain the land available for agriculture, with producers required to urgently adopt sustainable practices and technologies at a higher cost.
“In response to higher production costs, the price of some agricultural commodities could rise, increasing input costs for other sectors, such as manufacturing and retail,” said the report.
Risks would significantly decrease if companies aligned their operations and strategies with the Kunming-Montreal Global Biodiversity Framework (GBF) targets, said the authors, with profit losses expected to drop by up to 78% compared to the current scenario.
While the analysis focused on five countries, these are diverse enough to allow for insights that can be applied to much of the African continent, according to the authors.
“Africa is both heavily dependent on nature and experiencing rapid nature loss,” they said.
“The alignment of the private sector with the nature-positive transition could generate a range of environmental and economic benefits … including improved employment, stronger export receipts, and reduced pressure on household debt.”
According to a report released by ANCA last year, 62% of African gross domestic product (GDP) is moderately or highly dependent on nature.
Globally, the World Economic Forum calculated that $44 trillion of economic value generation – over half the world’s total GDP – is dependent on natural capital. The annual loss of natural capital in Africa is estimated at $195 billion.
By Sergio Colombo – sergio@carbon-pulse.com
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