New report reveals South African banks’ agricultural lending portfolios are highly dependent on nature

Global Canopy report uses ENCORE to assess nature risk exposure of South African banks’ agricultural loan books.

Global Canopy has released a report detailing South Africa’s largest banks’ agricultural lending portfolios’ dependence on nature – ‘Accounting for Nature: An assessment of nature-related risk and prudential policy in the South African banking sector’.

The report includes:

• An assessment of the exposure of South African commercial banks’ agricultural lending portfolios to physical, nature-related risks.
• An overview of the nature-related disclosure and regulatory policy landscape in South Africa.
• Details on South African commercial banks’ response to nature-related risks.

Read the report

ENCORE was used in the research underpinning the report to assess the nature risk exposure of the banks’ agricultural loan portfolios.

Key insights from the report include:

• South African banks have a high dependence on nature through their lending to agriculture, forestry and fishing sector clients.
• Most of the banks studied have a very high dependence on multiple ecosystem services.
• Three-quarters of the banks studied provide significant finance to livestock businesses, which heavily depend on water-based ecosystem services.
• Most of the banks have a significant financial stake in crop-related businesses, which depend on water flow- and soil quality-regulation services.
• The banks would benefit significantly from the restoration of native vegetation given its key role in regulating water quantity and quality, soil quality and climate conditions.

“The agricultural lending portfolios of the largest commercial banks in South Africa are highly dependent on nature. This is significant as it represents potential financial risk to those portfolios, particularly if there is loss or degradation of nature in areas where agricultural assets are located.”

Dr Natacha Postel-Vinay, Technical Nature-Related Finance Lead at Global Canopy and an author of the report

“Nature degradation exacerbates the impact of extreme climate events and natural disasters. If, for example, deforestation has taken place to clear land for crops, it can intensify drought, which leads to reduced yields or failed crops, directly affecting the profits and financial viability of the agriculture businesses these banks are financing. Likewise, loss of native vegetation can reduce the volume of pollinating species, and given the reliance of many crops on pollination as an ecosystem service, this can harm yields and reduce profits for agricultural businesses, which, in turn, is detrimental to the banks that finance them.” – Dr Natacha Postel-Vinay.

All clients in the agricultural lending portfolios of South Africa’s largest commercial banks depend on at least one ecosystem service, with most having ‘very high’ dependence on multiple ecosystem services, according to dependency analysis using ENCORE. 66.5% of the agricultural loans issued by one of the banks studied are tied to clients highly dependent on at least six different ecosystem services. Three-quarters of the banks studied invest significantly in livestock activities, which depend heavily on water-based services.  

The report makes recommendations for South Africa’s financial regulator, the South African Reserve Bank (SARB), including:

• Develop a strong policy environment for nature-related finance risk management, and engage financial institutions and businesses in the development of supervisory guidance for nature-related risks.
• Provide a roadmap for data collection relevant to nature finance, including offering guidance on locally applicable data support systems, repositories and custodianship.
• Provide clarity on metrics, targets and indicators required for nature-related disclosures and risk assessments.
• Provide strategic guidance on how to approach nature-related scenarios.

The report was developed with financial support from the Swiss State Secretariat for Economic Affairs, SECO, under the ‘From Awareness to Action: ENCORE Phase II’ project.

“Through the cooperation with ENCORE and the SARB, we’re supporting financial institutions in South Africa to recognise that nature is not just a backdrop. It’s a fundamental asset for achieving economic stability and growth. It’s about smart finance for a sustainable future.”

Daniel Lauchenauer, Head: Economic Cooperation and Development at Swiss State Secretariat for Economic Affairs SECO

ENCORE is a free, online tool that helps organisations explore their exposure to nature-related risk and take the first steps to understand their dependencies and impacts on nature.

Read the report