The Natural Capital Finance Alliance (NCFA), the Natural Capital Coalition, and the Dutch Association of Investors for Sustainable Development (VBDO) published a new framework to help financial institutions understand and assess their reliance on natural capital.
Called Connecting Finance and Natural Capital: A Supplement to the Natural Capital Protocol, the guide takes financial institutions through the process of identifying, measuring, and valuing material risks and opportunities as a means of informing financial decision-making.
This guide is primarily aimed at ESG analysts, environmental managers, responsible investment managers, due diligence specialists, risk managers, analysts, and portfolio managers working in financial institutions.
“The supplement was developed against the backdrop of growing acknowledgment that the natural systems that underpin the global economy are deteriorating past the point of effective service provision, and that this will have potentially significant consequences for many businesses, and subsequently, for those who have financed or insured them,” the authors say.
Natural capital is defined by the Natural Capital Coalition as the stock of renewable and non-renewable natural resources such as plants, animals, air, water, soil, and minerals that combine to yield a flow of benefits to people. “These benefits are commonly known as ecosystem services or abiotic services,” the guide says.
Although more financial institutions recognize the importance of these complex relationships, many still don’t fully understand their dependency on the natural capital and ecosystem service flows that are directly material to investment risks and returns, according to the supplement’s authors.
The guide is based on the Natural Capital Protocol framework, a standard decision-making process written for business that consists of four stages. In the supplement, the stages are why (frame), what (scope), how (measure and value), and what next (apply). Each stage is accompanied by key questions and outputs.
In addition, the Natural Capital Coalition published a series of case studies that support the new guide. Financial institutions featured in the case studies include ASN Bank, Bankinter, BNP Paribas Assets Management, Kepler Chevreux, Piraeus Bank, and Yes Bank.
Namita Vikas is group president and global head of climate strategy and responsible banking at Yes Bank, India’s fourth largest private sector bank. She said that the bank participated in developing the finance sector supplement and applied the methodology to their assured green bonds to measure the effects and dependencies of the projects that the bonds had financed.
“This process has allowed us to improve existing risk mitigation measures and to assess the impacts we are having through the lending of these assets,” Vikas said.