Published on October 17th, 2018 | by Carolyn Fortuna0
New Report Says Natural Capital Should Be Informing Financial Decision Making
October 17th, 2018 by Carolyn Fortuna
Most people want their financial advisors to supply them with information essential to their portfolios so they have a small competitive advantage. It’s also important to many small investors today that their transactions are generating benefits to “natural capital” — clean air, oceans, ecosystems, and minerals on which our goods and services so often depend.
However, natural capital is usually quite invisible in the financial decision making of leading companies in the corporate sector. It’s time for more financial institutions to change their perspectives about the importance of natural capital within their financial considerations.
What better way is there to connect business, government, civil society, and finance to the importance of natural capital than through a common language? That’s the goal of a global multi-stakeholder collaboration that brings together leading initiatives and organizations to harmonize approaches to natural capital. Indeed, common understandings about natural capital can encourage wider financial discussions around moving from impact to dependency, from measurement to valuation, from stocks to flows, and from separate issues to a systems approach. They can help to balance short term goals with long term resilience so natural capital assessments include risks and opportunities and lead to better informed decisions.
“Connecting Finance and Natural Capital: A Supplement to the Natural Capital Protocol (the Supplement)” provides a framework for financial institutions to assess the natural capital impacts and dependencies of their investments and portfolios. This Supplement was developed by the Natural Capital Coalition, Natural Capital Finance Alliance, and the Dutch Association of Investors for Sustainable Development. The collaboration of stakeholders recognizes that the time has come for financial institutions to assess impacts that their portfolios are having on the health of natural capital stocks rather than their dependency on natural capital and ecosystem service flows, which are more directly material to investment risk and returns.
This Supplement will allow financial institutions to take a more integrated systems approach to natural capital and avoid situations in which assets like mines, factories, or power plants can become “stranded.” It is aimed primarily at ESG analysts, environmental managers, responsible investment managers, due diligence specialists, risk managers, analysts, and portfolio managers working in financial institutions.
4 Stages of Business Impacts on Natural Capital
Financial institutions have complex relationships with nature and natural systems. The natural capital approach is designed to generate trusted, credible, and actionable information that can be used to inform decisions around operational, market, reputational, and societal risks. It can also be used to identify and unlock opportunities for innovative solutions in a changing market.
The Supplement covers activities within the finance sector, with a specific focus on the following:
- Banking: Project finance, corporate lending, and underwriting;
- Investment: Investment across the range of asset classes (e.g., equities, corporate bonds, sovereign bonds, property, private equity, infrastructure), active ownership (engagement), and impact investing; and,
- Insurance: Corporate underwriting and reinsurance, with investment management activities covered under investment.
Drawing upon a widely accepted, scientifically robust, and useful guidance, the Supplement is based on the framework of the Natural Capital Protocol. This standard decision-making process is written for business and comprised of 4 four stages to make the Protocol more applicable and practical for financial institutions.
- The Frame Stage introduces concepts such as natural capital, ecosystem services, and natural capital impacts and dependencies. The stage explains how these concepts can pose risks and opportunities to the finance sector, and why a natural capital approach can help identify and manage them. Natural capital thinking provides financial institutions with more in-depth understanding of the interconnections and trade-offs between all environmental issues.
- The Scope Stage helps define objectives and identify the audience for the results of natural capital assessments. It is a guide through a series of interrelated decisions to focus and boundaries. Scoping is an iterative process where decisions are refined over time, both during the scoping process and during the later Stages of the assessment. The underlying concepts of impact drivers, impact pathways, and dependency pathways. Are new to many institutions, yet they are integral to understanding the additional benefits of a natural capital approach.
- The Measure and Value Stage provides guidance on indicators, changes, and trends in natural capital. It offers a logical process for valuing the consequences of these changes and to ascertain their relative importance, worth, or usefulness. A natural capital approach provides understanding of what inputs and outputs mean in terms of value to society and value to businesses and financial institutions. Natural capital valuation provides the context behind progression from measurement to valuation and the extent of risk, exposure, and opportunity to better inform decision making.
- The Apply Stage provides guidance on how to validate and verify an assessment and results and the actions to take to apply results and integrate them into existing processes. Upon completing a natural capital assessment, it is also important to reflect on the process as whole and on the lessons learned from the validation and verification process to inform future assessments and identify what could be improved.
Natural Capital Declaration and the IPCC Special Report
The Supplement extends the Natural Capital Declaration that was launched at the UN Conference on Sustainable Development (Rio +20) in 2012 and has since been signed by the CEOs of more than 40 financial institutions. The Declaration demonstrates commitment to the eventual integration of natural capital considerations into financial sector reporting, accounting, and decision-making by 2020.
The Supplement was published against the backdrop of the latest Special Report from the IPCC (Intergovernmental Panel on Climate Change), which warned of the negative consequences to the natural systems that underpin the global economy, given the current rate of global warming. The IPCC report suggested an urgent need for business to understand its impacts and dependencies on natural capital.
The launch of this guidance has been supported by a series of case studies from leading financial institutions, including ASN Bank, Bankinter, BNP Paribas Assets Management, Kepler Chevreux, Piraeus Bank, and YES Bank. Case studies are available on the Natural Capital Hub.