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New Tool Reveals $1.6T Risk of Failing to Account for Natural Capital

Following the release last month of its groundbreaking guide to help financial institutions understand and assess their reliance on natural capital, this week the Natural Capital Finance Alliance (NCFA) launched the world’s first comprehensive tool linking environmental change with its consequences for the economy.

The web-based tool, called ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure), will help global banks, investors and insurance firms assess the risks that environmental degradation, such as the pollution of oceans or destruction of forests, causes for financial institutions.

For example, a showcase assessment of the FTSE 100 using information in ENCORE found that in 13 of the 18 sectors that make up the index, a total of $1.6 trillion in net market capitalisation is associated with production processes that have high (or very high) material dependence on nature. Examples of such high economic dependencies include the harvesting of innumerable agricultural crops and its reliance on pollination, or metal processing and its reliance on ground water provision.

The ENCORE tool is managed by the NCFA — a collaboration between the UN Environment Finance Initiative (UNEP FI) and Global Canopy, in partnership with UNEP-WCMC. It launched this week at the UNEP FI Global Roundtable in Paris. YES Bank, First Rand and VicSuper were among the financial institutions supporting the tool at the launch; other NCFA signatories involved in the creation of ENCORE include the International Finance Corporation, UBS, National Australia Bank, Citi, UniCredit and CDC Biodiversité.

Anders Nordheim, Programme Leader at UNEP FI and UNEP FI lead for NCFA Secretariat, said: “ENCORE provides the data and intelligence to plug nature into financial market decision-making. ENCORE helps close a knowledge gap for many capital market players. Whether the water required for agriculture, the forests that lock away carbon from the air, or the coral reefs that protect coasts from flooding — the role of nature in the economy must be better understood, quantified and protected by those who finance economic growth.”

ENCORE’s comprehensive database covers 167 economic sectors and 21 “ecosystem services” — i.e. the benefits that nature provides that enable or facilitate business production. ENCORE data has identified that the three sectors most materially dependent on nature are: Agriculture, Aquaculture & fisheries, and Forest products. Sectors such as Utilities, Oil & gas and Mining were also found to have a very high dependence on ecosystem services. The three most important ecosystem services for the global economy were found to be: Water provision, Climate regulation and Flood protection.

“Financial institutions globally need to gear up to face the impact of accelerating environmental change,” said Namita Vikas, Chairperson of NCFA and Group President and Global Head of Climate Strategy & Responsible Banking at YES BANK Ltd. “In order to safeguard their operations and portfolios, financial institutions will require robust mechanisms to explore, identify and manage environmental risks. The launch of ENCORE is a key step towards this, and will not only enable financial institutions to easily identify and mitigate the impact of natural capital risks, but also help to mainstream natural capital considerations in decision-making processes.”

Madeleine Ronquest, Head of Environmental and Social Risk, Climate Change at FirstRand Limited said: "ENCORE enabled us to look at our portfolio in a new way, looking at thresholds and exposure. It can help us forecast and has opened up potential new opportunities. It brought our teams together in a valuable learning journey. We are very happy with the outcomes of the testing phase and got far more out of it than expected."

Kim Farrant, Corporate Responsibility and Responsible Investment Manager at VicSuper said: “VicSuper is proud to support the launch of ENCORE, which focuses on the integration of natural capital valuation into decision-making processes by the finance sector. As an organisation that uses the International Integrated Reporting <IR> Framework for our annual reporting, we see this tool supporting us to measure and report in relation to natural capital — one of the six capitals of the <IR> Framework. Valuation of natural capital has the potential to support decision-making in relation to both our own operations and our portfolio and will enable us to measure our use of natural capital, our impact on natural capital and the value generated for our fund and stakeholders through the transformation of natural capital.”

The ENCORE project has been made possible with funding from the Swiss State Secretariat for Economic Affairs and the MAVA Foundation.