The South African development bank for the agriculture sector and UNEP FI member is taking action on nature-related risks, as drought contributes to loan defaults in their portfolio.

Natural capital risks are not hypothetical for South Africa’s Land Bank. The development bank dedicated to serving the agricultural sector recently found many of its clients defaulting on their loans due to drought.

“Historically, the Bank has been very responsive to droughts, but it has treated them as single events and hasn’t looked at them in the context of climate change,” says Nehru Pillay, General Manager, Research and Intelligence at the Land Bank. “We need to look at the bigger picture now and have a long term response to climate change.”

Alongside responding to the climate crisis and other nature-related risks, a priority for Land Bank is shifting its portfolio towards serving emerging farmers and removing the legacy of past racial and gender discrimination. In the next few years, the Bank aims to increase its proportion of loans to black smallholder farmers and agri-businesses. To ensure the long-term success of South Africa’s agriculture sector, Land Bank considers it vital to simultaneously support equitable ownership of land and tackle natural capital risks.

“Finance is still often seen as separate from environmental sustainability, but this is a problem. As an agriculture bank, everything Land Bank does ultimately relies on the environment.”
– Nehru Pillay, General Manager, Research and Intelligence at Land Bank

Moving beyond compliance 

Land Bank has been looking at natural capital since 2012. At that time, putting an environmental and social strategy in place was made a condition to a loan the Bank was receiving from the African Development Bank. Initially, Land Bank’s natural capital work centered around proving compliance with environmental laws and regulations, but in 2016, new management initiated a change in thinking. “The new message within the bank became ‘for Land Bank to survive, the natural environment has to survive,’” explains Nehru Pillay. “As a result, the Bank changed and revised risk assessment policies and processes.”  In 2018, Land Bank joined the Principles for Responsible Banking, committing to aligning its business with the UN Sustainable Development Goals and the Paris Climate Agreement.

Understanding impacts and dependencies

“We are now grappling with many environmental risks at the same time,” explains Nehru Pillay. “Especially important for us is climate risk, including reporting in line with the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), and water. Biodiversity will also become an increasingly important topic.”

Over the last two years, the Bank has been engaging with the ENCORE tool to improve understanding of natural capital risks. Developed by the Natural Capital Finance Alliance (NCFA), a joint initiative of Global Canopy and UNEP FI, in collaboration with UNEP-WCMC, ENCORE maps impacts and dependencies on ecosystem services across 68 industries and 157 sub-industries. Financial institutions can then use this data to undertake company and project level analysis.

Over the last six months, Land Bank has collaborated with the NCFA on applying a Rapid Natural Capital Risk Assessment, using ENCORE. Focusing on large-scale irrigated and rain-fed maize production in the North West Province of South Africa, the risk assessment improved the Bank’s insight into natural capital risks by identifying which ecosystem services and natural capital assets its lending activities depend on. The assessment also allowed the Bank to identify previously hidden systemic risks in its portfolio not captured by traditional financial models, which they are now able to address.

Material ecosystem services and natural capital assets for maize production (ENCORE, 2020)

“ENCORE is one of the tools helping us deliver on the commitments we made under the Principles for Responsible Banking.”
– Nehru Pillay, General Manager, Research and Intelligence at Land Bank

Integrating natural capital across the bank

Understanding the overarching natural capital risks for the Bank is a first step. Assessing and managing those risks then requires the whole Bank to get onboard. “In the sustainability team, we depend on our frontline colleagues who are interfacing with the clients,” says Nehru Pillay. “And we also need to work with our credit governance structures to ensure they give greater weight to environmental risk.”

To strengthen the understanding of natural capital across the bank, Land Bank employees participated in training sessions from the Natural Capital Finance Alliance and UNEP-WCMC in November last year. “Each employee and function within the bank must understand how new risk assessment procedures for natural capital are essential to the financial success of the bank,” explains Nehru Pillay.

Creating green financial products

Land Bank will continue to ramp up its work on natural capital in the coming years. “We will strengthen our climate-focused interventions first. We will do more on energy, and we’ll do a lot on water,” Nehru Pillay says. On the climate mitigation side, the Land Bank is focusing on engaging with farmers on their energy consumption. To assess and manage water risks, the Bank is working with farmers to better understand how they manage their water. Land Bank is also exploring how to design green or climate-smart financial products for its clients.

Tackling biodiversity risk

Land Bank expects that biodiversity risks will be more difficult to tackle than climate and water risks, as data and metrics are more complicated for nature. But momentum for action continues to build as biodiversity loss and the associated risks continue to increase, and the Bank recognises that the trio of risks are all interlinked.

“All the banks want to familiarise themselves with biodiversity now. The challenge is how you gather all the information and data you need to assess that risk.”
– Nehru Pillay, General Manager, Research and Intelligence at Land Bank

New tools are emerging to support banks in assessing and managing their biodiversity risk: ENCORE is launching a biodiversity module later this spring. The initiative to bring together a Taskforce for Nature-related Financial Disclosures (TNFD) is working towards launching the Taskforce itself this year. Large multilateral development banks continue to strengthen their stance on nature and biodiversity alongside climate, which will also enable and incentivise other lenders to follow suit.

Written by Beate Triantafilidis, Content Lead, Finance Sector at Global Canopy
First published on Natural Capital Finance Alliance | Photo by Bence Balla-Schottner on Unsplash

The NCFA has published a step-by-step guide for natural capital risk assessments for banks. Watch this space for upcoming updates of the ENCORE tool: New functionalities are launching this month, and a new biodiversity module will be released later this spring. Follow us on social media to stay up to date with the latest: @NatCapFinance @globalcanopy @UNEP_FI @unepwcmc