Why natural capital matters
The natural environment underpins all of the world’s economic activities. The World Bank has estimated that naturally occurring assets such as geology, soil, air, water, lora and fauna make up 36% of total wealth in the developing world.
It follows that careful stewardship of natural assets, through better management of natural capital-related impacts and dependencies, while realising opportunities to invest in nature, will support economic resilience and contribute to greener economies.
Companies that receive inancial backing and risk cover from the world’s inancial institutions often have signiicant exposure related to these stocks of natural assets. By integrating this exposure into
portfolio risk assessments, signatories to the Natural Capital Declaration (NCD) are able to manage their own institutional exposure through indirect impacts and dependencies on natural capital.
The process of identifying and managing
natural capital risks enables inancial institutions to quantitatively account for these risks and opportunities in their portfolios in relation to constituent companies.
On a company level, exposure to drought, water pollution, deforestation and climate change can all be managed. On a macro level the world’s inancial institutions are able to contribute to, and articulate their commitment to, global sustainable development.
Building resilience to
natural capital-related
exposure
Natural Capital Physical Economy
Real Economy
Financial Economy
Depletion/Pollution Capital Misalignment Scope 1-2 type of pollution/depletion
Sustainable operations / Mitigation Capital / Advocacy
Direct Investment in NC preservation / replenishment Natural
Capital input shock
Economic shock
Damaging factors
Mitigating factors
Risk transmission Figure 1 : Flow of natural capital inputs and economic risk factors
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About the Advancing Environmental
Management Project (AERM)
Natural Capital Declaration projects such as the Advancing Environmental Risk Management (AERM) project aims to beneit from the collective expertise of the NCD’s 40+ inancial signatories, as well as supporting organisations, to develop approaches to risk management that are customised for different sectors and regions.
The project has received signiicant support from the Swiss State Secretariat for Economic Affairs (SECO), the MAVA foundation and participating inancial institutions. SECO is already supporting the Natural Capital Agenda at government level through Wealth Accounting and the Valuation of Ecosystems (WAVES) and at the company level through the Natural Capital Coalition.
The methodology for mapping natural capital
The aim of this NCD-backed project is to support inancial institutions in the process of embedding natural capital-related risks within risk assessment methods and decision-making tools.In phase 1, NCD will collect relevant natural capital data from each location that can be linked to an inventory of economic activities. The phase 1 natural capital and economic risk data will form the basis for systematic risk analysis globally, with speciic attention to Colombia, Indonesia, South Africa and Peru.
This data will form the foundation for phase 2, in which speciic risk assessment methodologies and tools will be developed to assess the economic impacts of speciic natural capital risks and to embed the systematic consideration of these risks within existing risk assessment and other investment decision-making tools.
The phase 2 economic impact and resilience
assessment for integration into credit risk will be tested in sectors, regions and asset classes deined by the inancial institutions that are part of the project.
As a result of this project, inancial institutions will work towards quantifying and incorporating natural capital risks into lending and investment decisions, signalling a signiicant breakthrough in risk management practices. This work will also be critical in helping inancial institutions better support and help realise climate and sustainable development commitments.
Get involved
Financial institutions are integral to the world’s economies and as such have tremendous
inluence on economic outcomes. By
becoming a signatory to the NCD you will contribute to understanding natural capital-related impacts and dependencies for the
inance sector, thereby building the business
case for developing more resilient business models and contributing to the world’s
transition to a greener economy. Find out how to become a member of the NCD and/or get involved with the AERM project here.
© iStock : Sasha Radosavljevic
© iStock : Herianus
