Natural Capital Finance Alliance
About Global Canopy Programme
The Global Canopy Programme (GCP) works to demonstrate the scientiic, political and business case for safeguarding forests as natural capital that underpins water, food, energy, health and climate security for all.
About UN Environment Finance Initiative
The UN Environment Finance Initiative (UNEP FI) is a global partnership between UN Environment and the inancial sector. Over 200 inancial institutions, including banks, insurers and fund managers, work with the UNEP FI to bring about systemic change in inance to support a sustainable world.
© Natural Capital Finance Alliance, October 2016
The business case for valuing natural capital
Natural capital is deined as the world’s stocks of natural assets, which include geology, soil, air, water and all living things, that yield a renewable low of goods and services and provide a range of direct and indirect beneits to businesses and society. Although natural capital underpins economic prosperity and human life, it is often not adequately valued by society.
Academic studies have estimated the total value of
global ecosystem services at over US$125 trillion
per year.1 But there has been a marked decline in natural capital in 116 out of 140 countries, with projections suggesting that a further 10% of global natural capital will be eroded by 2030.2
Financial institutions, businesses, and policy-makers are becoming increasingly cognizant of natural capital’s role in the economy and society, and the risks of neglecting its value. We see this in the 2015 Paris Climate Accord to limit global temperatures to 2°C above pre-industrial levels, the UN Sustainable Development Goals, and the New York Declaration on Forests.
The business case for understanding the implications of this trend is two-fold:
1. Recognising, measuring, and understanding the dependencies and impacts of natural capital as an integral part of the economy, rather than as a separate function, thus providing a better foundation to manage risks;
2. Meeting growing demand for environmentally sustainable products and services, both from consumers and in response to new government regulations, which provide opportunities.
There are currently no uniform global approaches inancial institutions can use to systematically consider natural capital in the provision of investment, lending and insurance products and services. Led by inancial institutions, the NCFA is addressing this gap by developing models, tools
and approaches that enable the sector to better
understand – at the asset and portfolio levels—their dependence and impact on natural capital.
1. UNEP Inquiry, The Financial System We Need, Aligning the Financial System with Sustainable Development, October 2015 2. Ibid.
3. 2030 Water Resources Group, Charting our Water Future, 2009
4. http://wwf.panda.org/wwf_news/?244770/Ocean-wealth-valued-at-US24-trillion-but-sinking-fast 5. http://www.fao.org/sustainable-development-goals/en/;
In numbers...
• The economic value of freshwater is
valued at $73.5 trillion annually3
• Fish stocks are estimated to contribute
$2.5 trillion annually to the global
economy4
• Forests provide more than $1.5 trillion
directly through forestry and indirectly by providing energy, food, shelter, medicine, soil and water conservation, desertiication control and carbon
Our mission
The Natural Capital Finance Alliance (NCFA),
co-convened by the UN Environment Finance Initiative
(UNEP FI) and the Global Canopy Programme (GCP), is a growing alliance of inancial institutions that are collaborating to understand the importance of integrating natural capital-related considerations into their activities as described by the Natural Capital Declaration (NCD).6
It is our mission to advance the inancial sector in integrating natural capital considerations within inancial products and services, to better understand risks, pursue opportunities, and establish the
foundation for resilient long-term economic growth that protects nature and societies.
Our models do not aim to put a price on nature. Instead by quantifying the risks that clients or investee companies face from their impact and dependency on nature, we enable inancial institutions to better understand the value nature provides. Depletion and degradation of nature constitute risks to growth and resilience, while protection of nature offers opportunities for prosperity and innovation.
- Julie Gorte Senior Vice President, Sustainable Investing
Pax World
- Simon Connell Senior Manager, Risk Framework and Engagement
Standard Chartered
The NCFA is working on standardised
methodologies to quantify the natural capital-related inputs to the economy in order to improve decision-making in the inance sector, by addressing four core questions:
1. How is natural capital relevant to the
inancial sector?
2. What should be taken into consideration and what are the emerging and potential capacities to monitor and manage natural
capital risks and opportunities?
3. How can natural capital-related dependencies
and impacts be integrated into inancial
products, services, accounting and reporting
while safeguarding the beneits of natural capital assets?
4. How can the inancial sector facilitate an orderly capital shift to support the transition needed to achieve the SDGs and UNFCCC
COP21 climate commitments?
6. The Natural Capital Declaration was launched at the UN Conference on Sustainable Development (Rio+20) in 2012. It has been signed by the CEOs of more than 40 inancial institutions, and demonstrates their commitment to the integration of natural capital considerations into private sector reporting, accounting and decision-making by 2020.
The NCFA is developing the tools and methodologies that inancial
institutions will all be using in 10 years’ time.
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Quantifying natural resource and environmental risk factors can
provide the inancial sector with an opportunity to make a signiicant
breakthrough in risk management practices.
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Projects
With inancial institutions’ expertise and with the support of donors, the NCFA has developed practical applications to manage risk and identify opportunities across natural capital assets such as water and forests.
Water risk management tools
Increasingly, companies are inding it challenging to access suicient quantities of water for critical business operations. The costs of securing water inputs are already rising for water-intensive companies in locations vulnerable to water shortages. Since 2011 companies have spent more than $84 billion7 worldwide on
conserving, managing and obtaining water – a number projected to rise as climate change and demographic pressures affect water supply and demand. There are also business opportunities, for example, 55 different solutions have been identiied
to help address water availability in China that
would also result in $US 21 billion in savings8.
It is therefore critical for inancial institutions
to manage the risks associated with companies
exposed to water scarcity and to identify the opportunities.
Bloomberg water risk valuation tool
In September 2015 Bloomberg and NCFA launched the Water Risk Valuation Tool (WRVT), enabling users to incorporate water risks into company valuations across copper and gold mining companies.
The tool provides a quantitative approach to
evaluate how water risk factors can be incorporated into company valuations using a discounted
cashlow model. The scenario directly links water risk to revenue, while an optional social cost of
water (shadow price) can be accounted for in operating expenses.
The tool builds on Bloomberg’s Carbon Risk Valuation Tool and maps speciic mine asset locations and production volumes against water stress indicators provided by the World Resources Institute (WRI) Aqueduct water database.
- Su Gao WRVT project manager and Senior ESG Analyst
Bloomberg
Corporate bonds water credit risk tool
The Corporate Bonds Water Credit Risk Tool
provides investors with a systematic and practical approach to assess water risk in corporate bonds
and benchmark companies against sector peers, taking account of projected changes in water availability to 2040.
7. Global Water Intelligence
8. Charting Our Water Future: Economic Frameworks to Inform Decision-Making, McKinsey 2016
The tool is powerful in that it
does not require the user to
have any speciic expertise
or additional datasets – it
is ‘plug and play’ with the
Bloomberg terminal to help
users conduct research in an
easy, cost effective way while
retaining a detailed proile of
the valuation impacts due to
water risk factors.
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Projects
Developed through a partnership between the NCFA, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) and the German Association for Environment and Sustainability in Financial Institutions (VfU), the Corporate Bonds Water Credit Risk Tool enables users to integrate inancial risk exposure to water scarcity into standard inancial models used to assess the credit strengths of corporations across water-intensive sectors.
The tool currently covers 24 companies and provides a model to allow users to add their own companies and analyses in order to address the information gap in traditional inancial analysis. It enables analysts to identify companies that depend heavily on access to water in locations that are exposed to water stress and to quantify the potential impact of water scarcity on the company’s creditworthiness.
Forest risk management tools
Financial institutions are exposed to risks from deforestation by inancing companies whose activities contribute to deforestation and forest degradation through their operations or soft commodity supply chains.
The NCFA has developed the Soft Commodity Forest-risk Assessment (SCFA) tool with Sustainalytics to reduce the deforestation risk caused by the unsustainable production, trade, processing and retail of soft commodities, especially soy, palm oil and beef. The production of these commodities drives deforestation and forest degradation in tropical forests.
Financial institutions are encouraged to identify how
they can improve their own lending and investment
risk policies to systematically consider natural capital in the credit policies of speciic sectors, including commodities, that may have a major impact on natural capital either directly or through the supply chain.
Environmental risk management
tools
In October 2015, the NCFA launched its project on environmental risk management with support from the Swiss State Secretariat for Economic Affairs (SECO) and the MAVA foundation.
The Advancing Environmental Risk Management (AERM) project aims to catalyse sustainable investment and lending globally by reducing risks from environmental and natural resource pressures.
The objective is to develop methodologies and tools
to map natural capital risks across lending and investment portfolios with the aim of embedding them in credit risk assessments.
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- Courtney Lowrance Director, Environmental and Social Risk Management
Citi
Join us
Join us to help establish the foundation for resilient long-term economic growth.
The NCFA provides a forum for inancial institutions
to work together and develop standardised
methodologies and structured approaches to quantify natural capital inputs and externalities. Supporters of the NCFA share emerging knowledge in order to inform better decision-making and to strengthen the capacity to embed natural capital considerations.
• Contribute expertise or provide practical
feedback on NCFA projects and tools
• Join our network and work with supporters and aligned organisations to drive awareness
• Sign the Natural Capital Declaration (inancial
institutions)
• Partner with us to encourage wider integration
of natural capital in the inance sector
• Become a donor and support the work of the
NCFA
Demonstrate leadership
Ways to get involved
We are proud to join the Natural Capital Declaration to deepen this
work of integrating natural capital considerations into our work.
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For more information visit
www.naturalcapitalinancealliance.org
or contact us at
