Why is natural capital important to the finance sector?
The natural world (or natural capital) is usually invisible in business’ decision-making, and yet the companies that financial institutions lend to, invest in and provide risk cover for, both depend and impact on it. The realization of these impacts and dependencies is growing, and leading companies in the corporate sector are now carrying out natural capital assessments to understand their risks, identify opportunities, and make better informed decisions. For industries dependent on natural capital, continued erosion of the global resource base constitutes a material risk if the ability of a business to access the necessary inputs becomes impossible or significantly increases costs. This may be due to physical factors, such as drought or extreme weather events, or due to changing legislation and regulations, such as water permitting, greenhouse gas emissions schemes or a change in subsidies. Financial institutions are beginning to also recognize the gap in their information sources and the indirect impacts and dependences they have through their banking, investment and insurance activities.
Supporting the finance sector to manage natural capital risks and opportunities
The Natural Capital Protocol has created a globally recognized and standardized framework for business. This supplement to the Protocol, aims to connect finance and natural capital in the same way, and to create a common language across business, government, civil society and finance on this important topic. The Finance Sector Supplement (FSS) has been developed in partnership with the Natural Capital Coalition and VBDO, and provides a framework for financial institutions (FIs) to assess the natural capital impacts and dependencies of their portfolios. It explains why FIs should undertake this assessment, what the impacts and dependencies are, and what techniques to use, and is aimed primarily at ESG analysts, environmental managers, responsible investment managers, due diligence specialists, risk managers, analysts, and portfolio managers.
About Natural Capital
The NCFA defines natural capital as the stock of ecosystems that yields a renewable flow of goods and services that underpin the economy and provide inputs and direct and indirect benefits to businesses and society. Natural capital is a subset of environmental, social and governance (ESG) factors that can be material to financial institutions, mainly through their allocations of capital to companies through loans and investments or premiums as part of an insurance contract.
About the Partners
The NCFA is a worldwide finance-led initiative to integrate natural capital considerations into financial products and services, and to work towards their inclusion in financial accounting, disclosure and reporting. Signatory financial institutions are working towards implementing the commitments in the Natural Capital Declaration through NCFA projects. These are overseen by a steering committee of signatories and supporters and supported by a secretariat formed of the UNEP FI and Global Canopy. Read more on the Natural Capital Coalition’s website.
The Natural Capital Coalition is a unique global multi-stakeholder collaboration that brings together leading initiatives and organizations to harmonize approaches to natural capital.
The Dutch Association of Investors for Sustainable Development (VBDO) represents private and institutional members who consider it important that the companies in which they invest are socially responsible.
Download the report here.