- New step-by-step guide from Natural Capital Finance Alliance, builds on launch of web-based tool ENCORE in November 2018.
- One week before Davos, financial leaders urged to consider “not just greenhouse gases, but also how to build wider ecosystem resilience from rainforests to coral reefs”. All sectors of the economy are increasingly exposed to damaging economic disruption as depletion of nature accelerates.
- The in-depth guide explains how to conduct a rapid natural capital risk assessment and has been piloted by banks in Colombia, South Africa and Peru.
- Project funded by Swiss State Secretariat for Economic Affairs (SECO) and the MAVA Foundation.
(Zurich, 16 January 2019). A week before the World Economic Forum in Davos, where global financial leaders will discuss society’s most pressing issues, the Natural Capital Finance Alliance (NCFA) has launched the world’s first step-by-step guide to help financial institutions conduct a rapid natural capital risk assessment. The Natural Capital Finance Alliance engaged with PwC to produce the guide.
The guide has already been piloted by five banks, including First Rand in South Africa who said it “enabled us to look at our portfolio in a new way”. It promotes the use of the recently launched ENCORE tool (Exploring Natural Capital Opportunities, Risks and Exposure), which enables financial institutions to understand and assess their exposure to natural capital risks.
The guide aims to fully unlock the power of ENCORE and, as part of the Advancing Environmental Risk Management (AERM) project, helps global banks to better understand how the pollution of oceans or destruction of forests, for example, may affect their financial future. AERM is a wider project by NCFA to help financial institutions understand and integrate the risks they face because of environmental degradation into their risk assessment methods and decision-making tools.
The guide has two core elements:
- Rapid Natural Capital Risk Assessment, which allows an institution to quickly identify the areas of highest natural capital risk.
- Sector/Asset Analysis, which uses data on drivers of environmental change and the state of natural capital assets, to assess the likelihood of disruption of relevant ecosystem services. This could help financial institutions in their climate scenario analyses as recommended by the TCFD. By combining a comprehensive knowledge base with environmental scenarios and location-specific asset data, financial institutions can assess and manage their natural capital risk in qualitative and quantitative terms. This insight can be incorporated into existing risk processes, for example, by combining internal data on client location with environmental data to improve strategic scenario planning and credit risk management.
Attendees at today’s event, held in Zurich and co-hosted by Swiss Sustainable Finance (SSF), will receive an overview of ENCORE, as well as an introduction to the broader AERM project, both funded by the Swiss State Secretariat for Economic Affairs (SECO) and the MAVA Foundation. The guide also includes case studies of how financial institutions globally are using the power of ENCORE to assess their dependence on nature.
Liliana de Sá Kirchknopf, Head of Private Sector Development Division, State Secretariat for Economic Affairs in Switzerland (SECO), said: “The degradation of natural ecosystems poses a material threat to future economic growth. Until now, the financial community was not able to systematically assess and manage such risks. That is changing thanks to our collaboration with the NCFA to create a natural capital framework for financial institutions. Practical tools like ENCORE define the link between environmental change and economic consequences, so market players are empowered to make sustainable financing decisions.”
Niki Mardas, Executive Director at Global Canopy, said: “This timely report sends a powerful message that when financial leaders consider the environment at Davos next week they must consider not just greenhouse gases, but also how to build wider ecosystem resilience from rainforests to coral reefs. If we are to build more sustainable capital markets, financial institutions must be able to easily integrate their dependence on nature into existing risk management. That’s why today’s launch of NCFA’s natural capital risk assessment framework is so important. Using it alongside the ENCORE tool, financial institutions can now systematically identify natural capital risks and act on them.”
Madeleine Ronquest, Head of Environmental and Social Risk, Climate Change at FirstRand Limited, said: “The South African economy has a deep dependence on nature, and is particularly vulnerable to extreme climatic events, which are becoming more frequent and intense. The severe challenges around the availability and supply of drinking water in Cape Town is just one example of this. The AERM project enabled us to look at our portfolio in a new way, looking at thresholds and exposure, especially in the case of water-related risk. It can help us forecast and has opened up potential new opportunities. It has 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.”
Jon Williams, sustainability and climate change partner at PwC UK, said:
“Our work with NCFA and its partners makes a further and material advance in environmental and social risk management in banks. The report provides practical guidance and tools for managing natural capital risks, present in many banking portfolios but often hard to identify, assess and mitigate. By piloting the approach with the banks involved in this project, we believe this provides a tested risk management framework that can be adopted by other financial institutions. Given the increasing erosion of natural capital and the increasing risks that businesses and their financiers face, this report is a timely addition to the tools available to risk managers.”
Dante Tosso, Gerente de Riesgo de Crédito y Gestión Corporativa de Riesgos, from Banco de Crédito del Perú (BCP) said:
“This project gives BCP a more rigorous methodology to measure natural capital risk and to understand the highest priority areas in terms of production processes and their dependencies on nature. It gives us a valuable opportunity to incorporate the risk assessment of natural capital into our risk models and credit reports. The ENCORE tool in particular gives us a means of knowing what our impacts and dependencies on nature really are, and thus significantly enriches our analysis of credit risk in clients and exposed sectors.”
Nancy Motta, Operational Risk Vicepresident from Davivienda said:
“From coffee to cattle, managing environmental risk in the agriculture sector is vital to Colombia’s future economic prosperity. Colombia is one of the largest coffee producers in the world, and the AERM project can help banks to understand exactly how exposed the sector would be if we allow natural services such as pollination or levels of soil minerals to be degraded. AERM has prompted Davivienda to review and improve its existing processes to screen new loans to the agricultural sector to ensure that these potential risks are adequately identified and evaluated.”
Carlos Nieto, Director de Riesgo de Crédito y Tesorería, from Banco de Bogota said:
“Tools like ENCORE are helping Banco de Bogota are interesting to understand its long-term exposure to natural capital risk, especially in areas within its current loan-book. Insights into, for example, how changing rainfall can generate different risk characteristics, is helping us to integrate concepts and processes of natural capital risk management in our operations and work with clients. ”
“El Banco de Bogotá ha encontrado interesante la herramienta Encore del NCFA para identificar de una manera más prospectiva los riesgos de capital natural dentro de los diferentes sectores que conforman el portafolio del Banco. Exploraremos la herramienta y la metodología para ir integrando conceptos de capital natural en los procesos de análisis y seguimiento que se realicen a los diferentes clientes y operaciones.”
Yvonne Baumann, Swiss Ambassador in Colombia, a key funder of the project said: “The degradation of natural ecosystems poses a material threat to future economic growth. Therefore, we need methodologies to systematically assess and manage such risks. Thanks to our collaboration with the NCFA we are providing practical tools like ENCORE to help the private sector to make sustainable financing decisions in a country such as Colombia with great presence of natural capital and an important financial sector”.
Madeleine Ronquest, Head of Environmental and Social Risk, Climate Change at FirstRand Group said:
“The South African economy has a deep dependence on nature, and is particularly vulnerable to extreme climatic events which are becoming more frequent and intense. The severe challenges around the availability and supply of drinking water in Cape Town is just one example of this. The AERM project enabled us to look at our portfolio in a new way, looking at thresholds and exposure, especially in the case of water-related risk.”
Julie Clark, Environmental Analyst from the Development Bank of Southern Africa (DBSA) said:
“Environmental risk management is a key part of DBSA’s work and it is important that we go beyond climate change to consider a wide range of potential risks among those we finance, including natural capital risk. AERM has helped us prioritise and plan ahead for those sectors most exposed to natural capital risk. It has highlighted, for example, the threat to our infrastructure portfolio from degraded flood protection or erosion control.”
-Ends-
Notes to editor
For more information or an exclusive interview with Niki Mardas please contact: Mike Weber, ESG Communications Tel: +44 (0)7932 577 755 | E: mike@esgcomms.com
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 Global Canopy Global Canopy is an innovative environmental organisation that targets the market forces destroying tropical forests. Our mission is to accelerate progress towards a deforestation-free global economy – through improved transparency, innovative finance and strategic communications. Since 2001, we have catalysed new thinking and action by leading governments, companies and investors worldwide. @globalcanopy
About UNEP FI The United Nations Environment Finance Initiative (UNEP FI) is a unique global partnership between United Nations Environment and the global financial sector founded in 1992. UNEP FI works closely with over 230 financial institutions who have signed the UNEP FI Statements as well as a range of partner organisations to develop and promote linkages between sustainability and financial performance. Through peer-to-peer networks, research and training, UNEP FI carries out its mission to identify, promote, and realise the adoption of best environmental and sustainability practice at all levels of financial institution operations. For more information, see www.unepfi.org
About SSF Swiss Sustainable Finance (SSF) strengthens the position of Switzerland in the global marketplace for sustainable finance by informing, educating and catalysing growth. The association, founded in 2014, has representation in Zurich, Geneva and Lugano. Currently SSF unites 108 members and network partners from financial service providers, investors, universities and business schools, public sector entities and other interested organisations. An overview of Swiss Sustainable Finance’s current members and network partners can be found here.
About PwC At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with over 250,000 people who are committed to delivering quality in assurance, advisory and tax services. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. PwC UK, PwC South Africa, PwC Colombia and PwC Peru were engaged with the Natural Capital Finance Alliance in this work.