(29 January, 2019). At an event in Johannesburg today the Natural Capital Finance Alliance (NCFA) has showcased the world’s first step-by-step guide to help banks conduct a rapid natural capital risk assessment. The guide is produced in collaboration with global audit firm PricewaterhouseCoopers.
The guide has already been piloted by five banks, including FirstRand Group and the Development Bank of Southern Africa and 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. For example, it highlights how sectors such as agriculture rely on pollination, or how metal processing depends on maintaining ground water provision.
The guide aims to fully unlock the power of ENCORE and, as part of the Advancing Environmental Risk Management (AERM) project, help global banks to better predict how the degradation of nature might 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 in their risk assessment methods and decision-making tools.
The guide also includes case studies of how financial institutions globally are using the power of ENCORE to assess their dependence on nature.
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. It can help us forecast and has opened up potential new opportunities. It 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.”
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. “
The guide combines a comprehensive knowledge base with environmental scenarios and location-specific asset data, so financial institutions can assess and quantify their natural capital risk in financial terms. This insight can be incorporated into existing risk processes, for example, by collecting information at origination, combining internal data on client location with environmental data, strategic scenario planning and credit risk management.
Niki Mardas, Member of the NCFA steering committee and Executive Director at Global Canopy, added:
“This timely report sends a powerful message to financial leaders that when they consider the environment 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. Together with ENCORE, institutions can now identify natural capital risks and act on them.”
Liliana de Sá Kirchknopf, Head of Private Sector Development Division, at the State Secretariat for Economic Affairs in Switzerland (SECO), who are a key funder of the project 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.”