Ignoring impacts and dependencies on natural capital poses material risk to finance sector

New framework provides guidance on importance of assessing natural capital impacts and dependencies in global finance

23 April Hong Kong: Today ‘Connecting Finance and Natural Capital: A Supplement to the Natural Capital Protocol’ (the Supplement) is launched during an event at the Hong Kong Institute of Certified Public Accountants. The Supplement provides a framework for financial institutions (FIs) to assess the natural capital impacts and dependencies of their investments and portfolios.

This framework has been developed by the Natural Capital Coalition (the Coalition), Natural Capital Finance Alliance (NCFA) and the Dutch SIF VBDO. The Supplement was developed against the backdrop of growing acknowledgment that the natural systems that underpin the global economy are deteriorating past the point of effective service provision, and that this will have potentially significant consequences for many businesses, and subsequently, for those who have financed or insured them.

The Supplement will guide FIs through the process of identifying, measuring and valuing material risks and opportunities as a means of informing financial decision making.

A growing number of financial institutions are recognising the importance of understanding these complex relationships with nature and natural systems. However, much of this understanding centres on specific issues – such as forests, water, climate change or energy – and on the impacts that their portfolios are having on the health of natural capital stocks, rather than their dependency on natural capital and ecosystem service flows, which are more directly material to investment risk and returns.

Stranded assets

This Supplement will allow financial institutions to take a more integrated systems approach to natural capital impacts and dependencies. For instance, overconsumption of water can lead assets such as mines, factories or power plants to become ‘stranded’, while corresponding droughts can impact crop yields and necessitate livestock culls which will affect the price of commodities and raw materials. The effects of these shocks can be significant and wide-ranging, but understood in context of the wider system, can be addressed as part of a unified strategy.

This natural capital approach is designed to generate trusted, credible, and actionable information that can be used to inform decisions around operational, market, reputational, and societal risks. It can also be used to identify and unlock opportunities for innovative solutions in a changing market.

The launch of this guidance has been supported by a series of case studies from leading FIs including: ASN Bank, Bankinter, BNP Paribas Assets Management, Kepler Chevreux, Piraeus Bank and YES Bank. Case studies will be made available at: https://naturalcapitalcoalition.org/tag/finance-sector-supplement-case-study/

The Supplement has been designed to align with other initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, which can be implemented alongside the Supplement.

Subsequent launches of this work will take place in Brussels, Sydney, Melbourne, the Netherlands, Madrid, Paris, Tokyo, London and New York over the course of 2018. A series of supporting webinars and workshops will also take place.

Mark Gough, Executive Director, Natural Capital Coalition said; “There is a clear need among financial institutions (FIs) to measure and value their relationships with natural capital, and to understand the effect that continued degradation will have on the health and resilience of their investments and portfolios. This Supplement will, for the first time, provide FIs with a clear and standardised framework to assess natural capital risks, identify opportunities and consequently inform decision making.”

Marie Morice, Director NCFA said; “This Supplement guides FIs on why they should assess their natural capital dependencies, what these are, what techniques to use, and how. It illustrates why asking important questions such as, ‘how is my portfolio exposed to droughts in the US’, or ‘what would be the impact of pollination collapse on my portfolio?’ are important, and how to access the information and tools to answer them. At the NCFA we develop tools to make answering these questions easier, and welcome the Supplement’s guidance on these issues”.

Angélique Laskewitz, Executive Director at VBDO said; “The Finance Sector Supplement to the Natural Capital Protocol connects finance and natural capital. It reveals impact and dependencies and moves beyond measurement alone to also valuing natural capital.”

Robert-Alexandre Poujade, BNP Paribas Asset Management said: “At BNP Paribas Asset Management, we are very happy to support the Natural Capital Protocol, and the Coalition’s fantastic work to move natural capital higher on companies’ agendas. Today, we have contributed by publishing a case study, focusing on our engagement with companies regarding their consumption of water. Rest assured that this is not a one off, and that we will continue to increase awareness among all of our stakeholders to protect natural capital.”

Namita Vikas, Group President & Global Head – Climate Strategy and Responsible Banking, YES BANK said; “Our participation in the development of Finance Sector Supplement to the Natural Capital Protocol has allowed us to apply this methodology to YES Bank assured green bonds, and to measure the impacts and dependencies of the projects which these bonds have financed. This process has allowed us to improve existing risk mitigation measures and to assess the impacts we are having through the lending of these assets. I would urge other financial institutions to use the Natural Capital Coalition’s Protocol, sector guides and Supplements. They have helped us to assess risks, highlight opportunities and build on our overall organizational strategy.”