Finance & Investment

New Guide Will Empower Banks to Quickly Assess Natural Capital Risk

New step-by-step guide from Natural Capital Finance Alliance builds on launch of web-based tool, ENCORE, in November.

Published 5 years ago | About a 4 minute read

Image: Pixabay / 3centista

A week before the World Economic Forum in Davos, where global financial leaders will discuss the most pressing issues to society and the economy, the Natural Capital Finance Alliance (NCFA), together with PwC, has launched the world’s first step-by-step guide to help financial institutions conduct a rapid natural capital risk assessment.

The guide has already been piloted by five banks, including First Rand in South Africa, which said it “enabled us to look at our portfolio in a new way.” It promotes the use of the recently launched ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) tool, launched in November, which enables financial institutions to understand and assess their exposure to natural capital risks.

“Our work with NCFA and its partners makes a further and material advance in environmental and social risk management in banks,” said Jon Williams, sustainability and climate change partner at PwC UK. “The report provides practical guidance and tools for managing natural capital risks, present in many banking portfolios but often hard to identify, assess and mitigate. By piloting the approach with the banks involved in this project, we believe this provides a tested risk-management framework that can be adopted by other financial institutions. Given the increasing erosion of natural capital and the increasing risks that businesses and their financiers face, this report is a timely addition to the tools available to risk managers.”

The guide aims to fully unlock the power of ENCORE and, as part of the Advancing Environmental Risk Management (AERM) project, helps global banks to better understand how the pollution of oceans or destruction of forests, for example, may affect their financial future. AERM is a wider project by NCFA to help financial institutions understand and integrate the risks they face because of environmental degradation into their risk-assessment methods and decision-making tools.

“The South African economy has a deep dependence on nature, and is particularly vulnerable to extreme climatic events, which are becoming more frequent and intense. The severe challenges around the availability and supply of drinking water in Cape Town is just one example of this,” said Madeleine Ronquest, Head of Environmental and Social Risk, Climate Change at FirstRand Limited. “The AERM project enabled us to look at our portfolio in a new way, looking at thresholds and exposure, especially in the case of water-related risk. It can help us forecast and has opened up potential new opportunities. It has 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."

The guide has two core elements:

Rapid Natural Capital Risk Assessment, which allows an institution to quickly identify the areas of highest natural capital risk.
Sector/Asset Analysis, which uses data on drivers of environmental change and the state of natural capital assets, to assess the likelihood of disruption of relevant ecosystem services. This could help financial institutions in their climate scenario analyses as recommended by the TCFD.

By combining a comprehensive knowledge base with environmental scenarios and location-specific asset data, financial institutions can assess and manage their natural capital risk in qualitative and quantitative terms. This insight can be incorporated into existing risk processes, for example, by combining internal data on client location with environmental data to improve strategic scenario planning and credit risk management.

Attendees at today’s event, held in Zurich and co-organised by Swiss Sustainable Finance (SSF), will receive an overview of ENCORE, as well as an introduction to the broader AERM project, both funded by the Swiss State Secretariat for Economic Affairs (SECO) and the MAVA Foundation. The guide also includes case studies of how financial institutions globally are using the power of ENCORE to assess their dependence on nature.

“The degradation of natural ecosystems poses a material threat to future economic growth,” said Liliana de Sá Kirchknopf, Head of Private Sector Development Division for SECO. “Until now, the financial community was not able to systematically assess and manage such risks. That is changing, thanks to our collaboration with the NCFA to create a natural capital framework for financial institutions. Practical tools like ENCORE define the link between environmental change and economic consequences, so market players are empowered to make sustainable financing decisions.”

“This timely report sends a powerful message that when financial leaders consider the environment at Davos next week they must consider not just greenhouse gases, but also how to build wider ecosystem resilience from rainforests to coral reefs,” said Niki Mardas, Executive Director at Global Canopy. “If we are to build more sustainable capital markets, financial institutions must be able to easily integrate their dependence on nature into existing risk management. That’s why today’s launch of NCFA’s natural capital risk assessment framework is so important. Using it alongside the ENCORE tool, financial institutions can now systematically identify natural capital risks and act on them.”