Singapore, Malaysia and Indonesia are central to global Forest Risk Commodity production. Singapore acts as a finance conduit to many companies financing or directly involved in production whilst Malaysia and Indonesia account for between 85-90% of global palm oil production.
Southeast Asia is also home to 15% of the world’s tropical rainforests which are home to around 20% of global plant, animal and marine species and significant stores of carbon. Trade-offs between conservation and economic development means forests are under serious threat, with some parts of Indonesia and Malaysia projected to lose up to 98% of their remaining forests in the next nine years.
This policy brief uses a novel approach to assess and understand the risks faced by Financial Institutions (FIs) and Forest Risk Commodity (FRC) producers from climate and land use change. The findings quantify the expected aggregate impact of forest and climate change risk on the near-term financial performance of the sector, which result in increased Probability of Default (PD) if the risks are not mitigated. The analysis highlights the most influential intervention points to minimize risks, which also contribute to decoupling forest and climate change risk from economic growth.
Many risk modeling approaches are based on historic trends. Due to the evolving nature of forest and climate risk, those methods can mis-estimate the true impacts. In this analysis KPMG’s Dynamic Risk Assessment (DRA) relies on expert elicitation and network theory to identify and generate an interconnected assessment of risks, it is an alternative method which overcomes data limitations. The method taps into the knowledge and experience of finance and commodity market experts to generate a list of key risks from which the likelihood, severity, near-term scenario, velocity and connections are established.