How investors in Asia Pacific can manage nature-related risks

Nature is defined as occurring in four realms – land, ocean, freshwater and the atmosphere. Within each realm, there are different types of natural ecosystem or ‘biome’, such as tropical forests, rivers and streams. Ecosystems are natural assets that provide ‘ecosystem services’ on which the world depends, such as fresh water for drinking and irrigation and pollination of crops by insects, birds and other animals². 

Right now, nature ​is declining faster than at any point in human history. The Asia Pacific region alone is experiencing alarming levels of nature loss, posing serious challenges to both the environment and the economy. Nature loss threatens business operations, supply chains and productivity. 

PwC analysis shows the undeniable and substantial risk inherent in the decline of nature associated with impact to business and 53% of Asia Pacific economic gross value added (GVA) are moderately or highly dependent on nature, amounting to US$18 trillion³.

In collaboration with the Asia Investor Group on Climate Change (AIGCC), PwC has released “Nature at a Tipping Point”, a guide for investors in the Asia Pacific region on understanding and identifying nature-related risks to achieve a nature-positive future. Through the working relationship, AIGCC and PwC aim to build awareness and encourage action towards the protection and restoration of the region’s natural environment. 

Asia Pacific is home to a diverse natural ecosystem that is essential for sustaining economic development and there’s a rising risk of nature loss in the region. 

• The World Wide Fund for Nature (WWF) estimates that the region's ecosystem health has declined by 55% since 1970⁴
• 53% of the region’s industries GVA are highly or moderately dependent on nature⁵
• 58% of Asia Pacific stock exchanges’ market capitalisation is moderately or highly dependent on nature⁶

Globally, 55% of the industries’ gross domestic product (GDP) are highly or moderately dependent on nature and 51% of the listed companies' market capitalisation on 19 of the world’s largest stock exchanges are highly or moderately dependent on nature.⁷

Inaction in preventing nature degradation could lead to significant direct and indirect material economic and financial risks. In recent years, the importance of addressing nature loss has become more apparent.

1. Target 15 of the Kunming-Montreal Global Biodiversity Framework⁸ requires governments to ensure large companies and financial institutions monitor, assess, and disclose biodiversity-related risks, dependencies, and impacts by 2030.

2. The Task Force for Nature-Related Disclosure (TNFD) recommendations, aligned to TCFD, provide a risk management and opportunities disclosure framework for the private sector to identify, assess, respond to and disclose nature-related issues. 

3. Mandatory regulatory requirements are being introduced that address nature-related risks such as the EU Deforestation Regulation (EUDR), the UK Environmental Act on the due diligence on forest risk commodities and the US Forest Act of 2023.^{9 10}

4. Government policies that support nature-relevant activities are being introduced, such as Singapore’s carbon tax, Indonesia’s carbon trading scheme for forestry and land use sectors, and Malaysia’s recently announced tax incentives for reforestation and conservation activities.

There is a growing expectation from regulators, shareholders, consumers, and civil society for investors in the Asia Pacific region to take responsibility and ensure that investments are not causing detrimental impacts on nature and to properly assess and manage nature-related risk.

Understanding nature-related risks can also help investors explore opportunities to support nature restoration and regeneration. The reversal of biodiversity loss presents more than US$ 10 trillion of economic value that could potentially be generated through solutions with a positive impact on nature.¹¹  

Almost every sector of the Asia Pacific economy is directly dependent on nature to a varying degree based on the ecosystem services that are being utilised. This dependency on nature and ecosystem services will likely translate into economic and financial risk if nature degradation and the impacts of this on economic actors are overlooked, and not properly considered in strategy, risk management and capital allocation decision making.   

In this report, we analysed 20 individual sectors and found that the economy's higher dependency areas, which include nine sectors, account for 20% of GVA in Asia Pacific. Out of the nine higher dependency sectors, agriculture, construction, and food, beverages and tobacco collectively account for the majority (72%) of the GVA in this segment. The other six sectors are forestry, fishery and aquaculture, water utilities, energy, chemical and materials, and supply chain and transport. 

The top three higher dependency sectors are heavily dependent on direct physical inputs from ecosystem services to maintain their production process, especially the availability of groundwater and surface water. In addition, the agriculture sector heavily relies on ecosystem services that enable production processes including pollination, soil and water quality and the hydrological cycle. Degradation of nature will diminish the capacity of nature to provide ecosystem services crucial to these sectors leading to a potentially significant financial material risk to them. 

Analysing the nature dependency of companies in Asia Pacific stock exchanges provides an additional perspective of the dependency of the capital markets on nature. Understanding the dependency of stock exchanges is especially important for institutional investors that are predominantly invested in public capital markets to enable better understanding of their portfolio exposure to nature-related risk.  

For individual exchanges in the Asia Pacific region, the share of stock market capitalisation comprising listed companies that are highly or moderately dependent on nature ranges broadly between 38% (on the National Stock Exchange of India (NSEI) and 75% (on the New Zealand Stock Exchange (NZX)). The variation is due to differences in sector composition, choice of listing location and market capitalisation¹⁰. 

For the detailed individual stock exchange dependency on nature, please refer to the interactive chart below.

• 11 out of the 14 stock exchanges fell into the higher to moderate dependency on nature, i.e. these are the three with highest value that’s dependent on nature: New Zealand Stock Exchange (NZSE), Taiwan Stock Exchange (TSE), and Korea Stock Exchange (KOSE) at 75%, 73% and 71% respectively. 
• The energy and food, beverage, and tobacco sectors predominantly contribute to higher to moderate dependency rating across these exchanges.  
• Only three stock exchanges fall into the category of lower dependence on nature, namely the National Stock Exchange of India (NSEI), Australian Securities Exchange (ASX) and Indonesia Stock Exchange (IDX). 
• Notably, the information technology, banking and capital markets sectors emerge as top contributors to lower nature dependency across these exchanges, as they rely on digital infrastructure, skilled human capital, and technological innovations to operate, reducing direct reliance on natural resources. 

Although nature dependence is generally less significant in these industries, there will be some exceptions from indirect exposure. An example is the healthcare delivery industry, which has dependence upstream in its supply chain, due to nature’s role in the production of medicines.

Assessing direct and indirect dependence is one of the starting points in managing nature-related risk. However, understanding dependence can be difficult when investment portfolios are spread across multiple sectors of varying nature dependencies in different geographic locations. 

The following checklist provides guidance for investors on how to prioritise their efforts to manage nature risks, and on how to initiate appropriate reporting and disclosure practices.

Investors that have identified nature-related risks and ways of mitigating or addressing these risks, will be better positioned to go beyond just reducing nature loss, by moving towards achieving a nature positive future. Understanding nature-related risks can help investors to explore potential nature-related opportunities, through adaptation and innovation, and through the transformation of business models and investments, to support nature restoration and regeneration. 

Opportunities include the sustainable use of natural resources, nature protection, restoration, and regeneration and improved investor returns. Although nature-based investment is still in its early stages, investors can begin to explore investment opportunities in companies or assets that directly provide nature-based solutions or support nature improvements.  

With every sector within Asia Pacific dependent on nature, nature-related risks cannot be ignored or fully diversified. It is vital that investors take the initial step to prioritise the nature-related issues in their portfolios and asset allocation based on materiality and direct their efforts toward action that will have the greatest impact.