Giving banks & investors the means to factor in nature in decision-making
Ever since I started my professional career in 2005, I've heard from many companies - particularly in the financial industry - that environmental topics such as water scarcity, deforestation and ecosystem loss are not financially material for them. If banks or investors were looking at it, then it was exclusively from a qualitative risk perspective e.g. excluding certain types of activities, refraining from financing anything in e.g. World Heritage Sites, etc.
However, what I felt was lacking was the ability or arguably necessity for banks and investors to start factoring in how any of the assets on their books could be financially impacted due to environmental and social factors, be it reputational risk, market risk or physical risks. That is the reason I founded the Natural Capital Declaration in 2012 together with Andrew Mitchell of Global Canopy, which is now branded as the "Natural Capital Finance Alliance".
Over the past few years, interesting tools have been developed to factor in deforestation risks for banks (developed with Sustainalytics), or factoring in drought risk in lending portfolios (developed with RMS and GIZ), or water scarcity in corporate bonds (with GIZ and VfU) and listed equities (developed with Bloomberg).
Late last year, a new product was revealed during the UNEP FI Global Roundtable in Paris: ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure). It is a is a pioneering tool that allows users to see how the economy depends on nature. It covers the whole economy so financial institutions can apply it to any portfolio by sector or location. It shows how environmental change creates risks and opportunities for businesses and those that fund them. What are some of its features:
- ENCORE enables financial institutions to visualise the dependencies of each economic sector on natural capital assets, region by region around the world.
- ENCORE maps all 167 sectors of the economy to the ‘ecosystem services’ on which they rely – such as water, raw materials, healthy soils and pollination. It analyses the main drivers of change affecting those assets, and assesses material impact.
- Users can select individual sectors, choose a type of natural capital asset, or focus on a driver of change and explore all the interlinkages and the risks they relate to.
- It shows that the three sectors most dependent on the services nature provides are: Agriculture, Aquaculture & fisheries and Forest products. These sectors are most exposed to economic disruption as depletion of nature accelerates.
- The ENCORE tool is produced by NCFA, a collaboration between the UN Environment Finance Initiative (UNEP FI) and Global Canopy, in partnership with UN Environment World Conservation Monitoring Centre. It was made possible with funding from the Swiss State Secretariat for Economic Affairs (SECO) and the MAVA Foundation.
Two things are needed now: a) finance institutions need to test the ENCORE tool (and provide feedback to the NCFA team) and b) additional work is needed to link environmental risk exposure to financial materiality. That said, we should take stock of a major milestone that has been reached and I congratulate the team that has been working tirelessly for more than a year to put it together. Well done!
The opinions expressed herein are solely those of the authors and do not necessarily reflect the official views of the GGKP or its Partners.