Banks, investors and insurers will soon be able to measure natural capital risks

Posted on 25/11/2018 by Anders Nordheim

Financial institutions around the world are waking up to the fact that businesses they invest in or lend to are at risk from environmental degradation affecting natural resources and systems – our natural capital. If a farmer’s crops are failing due to drought or lack of pollination, or manufacturers don’t have access to water to produce steel, will they be in a position to repay their loans or even keep their business afloat?

This, combined with increasing regulation, is driving financial institutions to measure and manage their exposure to natural capital risks. However, these institutions are facing a major problem – they do not have the tools to do this effectively. Until now.

Guided by leading financial institutions, the Natural Capital Finance Alliance (NCFA) has created the ENCORE tool – Exploring Natural Capital Opportunities, Risks and Exposure. It is a free online resource enabling financial institutions to see how industries depend on nature, or environmental information by area, to assess how environmental changes might affect their portfolio.

This is the first time that financial institutions will be able to access a comprehensive global database covering all economic sectors, identify risk hotspots and understand which drivers of environmental change are most material to their portfolios.

This tool has already highlighted sectors that are most exposed to natural capital risks, such as agriculture, fisheries, and forest products. Other heavily dependent sectors include energy, utilities and mining, all of which are materially reliant on natural capital to maintain their production processes.

To create this tool, the NCFA with the UN Environment World Conservation Monitoring Centre (UNEP-WCMC) first mapped economic sectors to the natural capital on which they rely, such as water, raw materials, healthy soils and pollination. The next stage was to assess the main drivers of change affecting those assets, such as pollution or climate change.

In this way financial institutions can begin to assess the contribution of the natural capital that businesses they lend to or invest in rely upon. For example, natural pollination is worth over USD 500bn annually to the economy; replacing this with paid-for, artificial pollination would be very costly for the agriculture sector and its investors.

Financial institutions need credible, standardised and relevant information for their risk management process, and to discover new opportunities. NCFA believes that ENCORE is an essential tool for banks, investors and insurers.

The ENCORE tool is part of the NCFA project Advancing Environmental Risk Management, funded by the Swiss State Secretariat for Economic Affairs (SECO) and the MAVA Foundation. It will launch on November 26 at the UN Environment Finance Initiative Global Roundtable.

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