Forty years ago this year, I stood on the summit of the second largest mountain in Borneo and looked down on the far horizon across an unbroken canopy of thick green rainforest. Today, that view is still green, but it is the green of palm oil plantations. The conversion of natural capital, like rainforests, for agriculture has been unprecedented in recent decades. It’s often fuelled by financial capital from international markets, largely blind to the destruction of nature.
Up in smoke
When rainforests go up in flames, that smoke also contributes to climate change. 25% of global carbon emissions come from deforestation and agricultural landscapes. However this loss of natural capital is not taken into account, particularly by the financial sector. The majority of banking, investment and insurance decisions are made without quantifying the impacts of these decisions on the natural world or on the services nature provides to our economy. They finance the production of commodities that clears land causing rainforests to go up in smoke. The Task Force on Climate-Related Disclosure (TCFD), has recently moved emissions from rainforests into the mainstream because fixing the problem in forested landscapes offers one third of what we can do now to meet climate targets set under the Paris Agreement. Increasingly financial Institutions (FIs) will have to report on the emissions linked to their investments and lending.
But it is not just emissions that are in the spotlight. The recent report by the EU High Level Expert Group (HLEG) on Sustainable Finance included a section on the broader issue of natural capital, acknowledging that the “the stock of natural capital is … deteriorating beyond its rate of renewal, not least due to policies that do not value it sufficiently”. It calls on better measurement and management of natural capital risks and opportunities. I believe climate risk is just the first step on a journey of acceptance that the depletion of natural capital is increasingly a material risk to the production of financial capital. What the financial sector needs is a change of mindset and tools to help them analyse and manage the risks and to identify opportunities.
However, it is not an easy task to analyse and quantify exactly how business sectors, from mining, to household goods or manufacturing, are dependent the services nature provides. This is where the Natural Capital Finance Alliance (NCFA) comes into play. The NCFA was created by Global Canopy and the UNEP Finance Initiative in 2012, to bring together forward-thinking leaders in the financial world and to design and deliver tools to better measure and manage natural capital.
What is already out there
The NCFA has already developed a number of tools looking at water risk and drought stress testing, as well as supporting the recent development of the Soft Commodity Risk Platform (SCRIPT) which for the first time allows asset managers to screen their portfolios for links to deforestation and then engage companies identified with the highest risks.
In a major development the NCFA team, that I advise, is now working on the Advancing Environmental Risk Management (AERM) tool will allow FIs to know what businesses are dependent on what kind of ecosystem services and how this puts their particular assets at risk. With the World Conservation Monitoring Centre (WCMC) in Cambridge, a comprehensive inventory of business dependencies on ecosystem services has already been collated for 167 sectors. It’s a vast undertaking, collating numerous environmental database across the globe. The next steps will be to test the tool with banks in Peru, Colombia, South Africa and some global FIs and to create a methodology to visualise and use the data.
Members of the NCFA are getting a first look at the model to test it on their portfolios. If you are an FI and would like to join in, let us know. You will be helping to to create a fundamentally new system for analysing investments and lending. As one NCFA Member said, “NCFA is creating the tools we shall all be using in the future.”
Guidance on Natural Capital for FIs
To get FIs started, in Hong Kong on the 23rd April] we’re releasing The Financial Sector Supplement (FSS), a first guide for the financial sector on Natural Capital. It’s a joint initiative between the NCFA, and the Natural Capital Coalition, with VBDO in the Netherlands. It will help financial institutions understand how natural capital impacts their lending, investment and insurance practices and decisions.
For more information on these initiatives, please contact Jessica Burnett on email@example.com.