Integrating Natural Capital in Risk Assessments: A step-by-step guide for banks

The Natural Capital Finance Alliance (NCFA) has developed a process that enables financial institutions to easily assess natural capital risks in their portfolio. This rapid natural capital risk assessment process focuses on identifying the ways in which businesses depend on the environment, how these dependencies are threatened by environmental change, and the resulting risks for financial institutions.

This report provides a step-by-step guide for conducting a rapid natural capital risk assessment, with links to additional online resources. The guide was developed based on experience piloting the approach with banks across three countries: Colombia, Peru and South Africa. By using this approach to understand their natural capital risk, banks will be better equipped to devise solutions that will protect their portfolios in an era of accelerating environmental change, as well as to identify potential opportunities around solutions provision and new products.

Key findings include: 

• Rapid natural capital risk assessments allow banks to improve their foresight by uncovering risks that they were previously unaware of.
• Rapid natural capital risk assessments can expose systemic risks in bank portfolios which would not have been detected in individual transaction assessments.
• The rapid assessment approach allows banks to monitor the evolution of natural capital risks and their potential impact on borrowers in the future.
• The rapid assessment approach is highly versatile, making it a valuable tool for any bank.

Key recommendations include:

• Banks can leverage their existing risk processes to embed natural capital risk thinking.
• Banks can derive significant value from qualitative natural capital assessments.
• Banks can increase the accuracy of their natural capital risk assessments by enhancing their data collection and storage processes.
• Considering natural capital risks at the portfolio level is necessary to complement transaction-level assessments.