With images of plastics washed up on shores all around the world, it is becoming increasingly evident that the way we treat our environment and the natural capital it provides may be coming back to bite us.
The increasing pressure being placed on the environment by growing populations and rising consumption levels threatens its ability to provide the goods and services which ultimately underpin all economic activities. This in turn produces a risk to businesses and those who invest in them. Even the many businesses that do not depend on nature to provide inputs to production may still rely on nature to provide valuable services such as water filtration, pest and disease control, or protection from flooding and landslides.
Banking for Natural Capital Risk
As environmental degradation reduces nature’s ability to continue providing goods and services, businesses that depend on them may see their production adversely impacted. We call this natural capital risk.
As providers of financial services to a broad spectrum of businesses across different sectors and geographies, banks have a complex and poorly understood exposure to natural capital risk. Information on how businesses depend on nature is historically fragmented and often anecdotal and coverage very uneven across sectors. This is why the Natural Capital Finance Alliance (NCFA) has created the Natural Capital Risk Knowledge Base, the first comprehensive and systematic source of information on how businesses depend on nature and the risks that they are exposed to as a result.
The knowledge base allows users to find the answers to the following questions:
How do businesses depend on nature? For 167 sub-industries across the economy, the research carried out by UNEP-WCMC (UN Environment World Conservation Monitoring Centre), provides systematic information on the type of goods or services that businesses depend on nature to provide; and which enable or facilitate their production processes.
This allows users to focus on their sectors of interest and gain a better understanding of the dependencies that their principal production process have on inputs from nature.
For example: A closer look at how a car is manufactured highlights the sector’s dependence on water provision for various industrial processes, on the capacity of ecosystems to dilute or mitigate various forms of effluents, and on the erosion and natural disaster risk protection that ecosystems provide.
What are the sectors with the highest number of dependencies on nature? The analysis reveals that the sectors with the highest number of dependencies on the environment include agriculture and forestry but also transport infrastructure and construction. The types of goods and services provided by nature include water provision, erosion control, flood protection, and climate regulation.
When do dependencies become disruption risks for businesses? We identify the specific features of the environment that are critical to continued provision of each type of good or service as well as the drivers of change that can affect them most. This allows users to assess the vulnerability of their sectors of interest to disruption based on the status of the ecosystems that provides the goods or services to the sector and on the threats that affect these ecosystems.
How can the disruption risk be measured in a specific context? We have identified data sources that inform on the current status and/or trend of ecosystem health, for example a certain habitat, and of the drivers of change that affect it, for example, climate change. These data sets enable users to conduct their own assessment of the exposure of businesses to natural capital risk in the specific geographic context that interests them.
This new knowledge base therefore represents a valuable and unique resource for businesses and the institutions that finance them. It enables them to better understand how environmental degradation and dependencies can affect their performance.
The full knowledge database will be available in November this year, if you would like to learn more about it in the meantime, there is a webinar on 31st May. The knowledge base forms part of the Advancing Environmental Risk Management (AERM) project.