New Tool Enables Financial Institutions to see their Exposure to Natural Capital Risk

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Data and Tools
25 November 2018
  • New ENCORE tool, launched today by the Natural Capital Finance Alliance, is three years in the making and aims to, “Plug nature into financial market decision-making”
  • A showcase assessment of the FTSE 100 Index using information in ENCORE found that 13 of the sectors in the FTSE 100, representing a total of $1.6 trillion in market capitalisation, were associated with production processes that have highly material dependence on nature.
  • Research on the production processes for 167 economic sectors shows 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 world’s first comprehensive tool linking environmental change with its consequences for the economy has been launched by the Natural Capital Finance Alliance (NCFA). 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.

A showcase assessment of the FTSE 100, one of the world’s most high-profile indices, 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 cereals and its reliance on pollination, or metal processing and its reliance on ground water provision.

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.

The ENCORE tool is managed by the NCFA, a collaboration between the UN Environment Finance Initiative (UNEP FI) and Global Canopy, in partnership with UN Environment World Conservation Monitoring Centre. It launches at today’s UNEP FI Global Roundtable in Paris. YES Bank, First Rand and VicSuper are among the financial institutions supporting the tool at the launch. Other NCFA signatories or institutions involved in the creation of ENCORE include IFC, UBS, National Australia Bank, Citi, UniCredit and CDC Biodiversite.

Ms Namita Vikas, Chairperson of NCFA and Group President and Global Head, Climate Strategy & Responsible Banking, YES BANK Ltd said:

“Financial institutions globally need to gear up to face the impact of accelerating environmental change. 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

"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, 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.“

Niki Mardas, Member of NCFA Steering Committee and Executive Director of Global Canopy said:

“ENCORE breaks new ground by looking systematically not just at finance sector impacts on natural capital, but on its dependencies too. From footwear to finance, hydropower to hotels, our economic prosperity relies on a renewable provision of benefits and services from nature. As ecosystems are increasingly degraded by threats like deforestation or pollution, financial risks grow too. Now, ENCORE enables financial institutions to zoom in on areas of natural capital concern or opportunity in their portfolios, delivering more fully than ever before on the E of ESG.”

Anders Nordheim, Programme Leader UNEP Finance Initiative and UNEP Finance Initiative 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.”

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

Raymund Furrer, Head of Economic Cooperation and Development, State Secretariat for Economic Affairs in Switzerland (SECO), said,

“Today, there is recognition that environmental risks are and will increasingly threaten financial stability. Also, no one disputes the need to internalize negative externalities. Combining these two aspects is the strength of the Natural Capital Finance Alliance. It has been a strategic priority of Switzerland to collaborate with NCFA and to support the development of ENCORE. ENCORE is a very practical web-based tool linking environmental change with its consequences for the economy.”

Holger Schmid, Director Sustainable Economy programme, MAVA Foundation said:

‘We welcome the ENCORE tool as a valuable resource for the finance sector - not just to identify the financial risks related to our dependence on nature, but also to identify key opportunities for investment in the transition to a green economy. ENCORE can help guide strategic investment and secure natural capital assets, for the long-term benefit of the economy and society’

Matt Jones, Head of the Business and Biodiversity Programme at UN Environment World Conservation Monitoring Centre, said:

 “While leading companies have been trying to address their dependence on nature for many years, a comprehensive understanding of the extent of business reliance on the natural world has been strikingly absent from our financial system. Through ENCORE the barriers to knowledge are broken down, bringing lenders and investors closer to valuing the dependence, impacts and risks associated with nature.”

 

Notes to editor

  • For more information or exclusive interview with Niki Mardas or Anders Nordheim please contact:  Mike Weber, ESG Communications

Tel: +44 (0)7932 577 755 | E: mike@esgcomms.com

  • The ENCORE tool is freely-accessible at: https://encore.naturalcapital.finance. This project has been made possible with funding from the Swiss State Secretariat for Economic Affairs (SECO) and the MAVA foundation. Work to support the development of ENCORE has also been undertaken by PricewaterhouseCoopers LLC and the Norwegian University of Science and Technology (NTNU).
  • Data in relation to the FTSE 100 Index is correct as of 31 October 2018. The production processes associated with the eighteen FTSE 100 sectors were assessed by UN Environment World Conservation Monitoring Centre (UNEP-WCMC) and flagged as highly dependent on ecosystem services if they had a very high or high material dependency on one or more ecosystem services as identified in the materiality assessment for the Advancing Environmental Risk Management project. The FTSE 100 sectors with no highly material dependencies (28% of the Index), were removed from the analysis. Please note this analysis only includes direct dependencies, not dependencies through supply chains, and was carried out at the level of production processes only, not at a company- level.

About NCFA

The Natural Capital Finance Alliance (NCFA) is a finance sector-led initiative, providing expertise, information and tools on material aspects of natural capital for financial institutions. It works to support these institutions in integrating natural capital considerations into their risk management processes and products as well as helping them to discover new opportunities. The NCFA secretariat is run jointly by the UN Environment Finance Initiative and Global Canopy.

About UNEP-WCMC

The UN Environment World Conservation Monitoring Centre (UNEP-WCMC) works with scientists and policy makers worldwide to place biodiversity at the heart of environment and development decision-making to enable enlightened choices for people and the planet. Our 100-strong international team are recognised leaders in their field and have unrivalled understanding of the institutional landscape surrounding biodiversity policy and ecosystem management. Based in Cambridge, UK, UNEP-WCMC is a collaboration between UN Environment and the UK charity, WCMC.