According to the capitals framework, there are five types of capital that enable our society and economy. Human and social capital enable productive and organized societies. Manufactured capital enables production processes, and financial capital allows for trade and ownership. Enabling all these other capitals is natural capital – the stock or flow of energy and material that produces goods and services. To mark the launch of ‘Connecting Finance and Natural Capital’, a supplement to the Natural Capital Protocol designed for financial institutions, Anders Nordheim, UNEP FI’s Programme Leader – Ecosystems and Sustainable Land Use explains the importance of considering nature as capital.
Natural capital consists of natural assets, such as water, forests and clean air that together provide humans the means for healthy lives and enables economic activity. Natural capital works like any other capital, if we draw down natural assets quicker than they can replenish, contaminate asset quality through pollution or wipe out natural assets, we have less to draw on in the future. In most of the world, natural capital is being depleted and destroyed, and this compromises our ability to continue business as usual.
Human interaction with nature, through direct impacts such as deforestation or pollution or indirect impacts such as climate change, is changing the enablers of life. This also impacts business and the financial institutions that provide lending, investment or insurance services.
Connecting finance and natural capital
In 2016, the Natural Capital Protocol created a standardized framework for business to understand and respond to natural capital issues that affect them now and in the future. The Protocol provides a clear framework to ensure that non-financial information is meaningful, robust, and pertinent for decision makers.
The Connecting Finance and Natural Capital Supplement makes this relevant to financial institutions. Developed with the help of the Natural Capital Finance Alliance (NCFA) and leading financial institutions, the Supplement provides guidance on how to conduct a full assessment of the impacts and dependencies around natural capital from their standpoint, providing practical examples and complemented with real-world applications from the world of finance.
Building on existing practices and recognizing opportunities
The NCFA has created a suite of tools for banks and investors to help them with this assessment process and manage risk and identify opportunities across natural capital assets such as water and forests. We are also currently working on a project which has mapped the reliance on natural capital for 160 economic sub-sectors. This will allow financial institutions to create a heatmap of natural capital dependencies and to identify potential hotspots. The Advancing Environmental Risk Management (AERM) research will be available towards the end of the year.
This consideration of nature as a form of capital provides a systematic way to improve financial institutions’ identification and management of natural capital-related risks and opportunities. The approach does not have to replace existing sustainability or environmental risk management initiatives, but can build on existing practices, translating commitment into action by helping to generate trusted, credible, and actionable information that can be used to inform decisions around operational, market, reputational, and societal risks. It can also be used to identify and unlock opportunities for innovative solutions in a changing market, thus enabling business unusual.
Download the report, ‘Connecting Finance and Natural Capital’ here.
Find out more about UNEP Finance Initiative and the work they do where financial institutions meet ecosystems here.