Banks Support Environmental Risk Management Program

The Natural Capital Declaration has launched an environmental risk management program, which develops methodologies and tools to map natural capital risks across lending and investment portfolios and to help embed them in credit risk assessments.

The $4.3 million fund program is supported by a number of leading financial institutions including Banorte, National Australia Bank, Pax World, UniCredit and the World Bank.

The Natural Capital Declaration is a global finance-led initiative convened by the Global Canopy Programme (GCP) and the UN Environment Programme Finance Initiative (UNEP FI).

The new environmental risk management project will be completed over 2.5 years. It aims to help catalyze sustainable investments and lending globally by reducing risks from environmental and natural resource pressures.

As a first step in this project the NCD has published a report, Towards Integrating Natural Resource Risks in Cost of Capital, State of play and the Way Forward, which analyzes responses from 36 financial institutions on their current approaches to natural capital risk management sheds light on the business case for the financial sector to integrate natural capital issues in investment and credit risk assessment.

The main findings from the report include:

• Almost half of the financial institutions see natural capital as very or extremely relevant to their core business strategy and/or portfolio risk management (a further one-third say it is moderately relevant).
• More than 75 percent of the financial institutions surveyed said they monitor natural capital risks at a transaction level. The next most popular approach was with regards to natural capital considerations in the due diligence/lending/investment processes at a portfolio level.
• Although 42 percent said they take natural capital factors into account in credit risk assessments, there are no standardized methodologies available and/or in use to enable systematic quantification of these risks.
• More than 80 percent of respondents think that a project to advance environmental risk management is an important step towards further integrating environmental risk considerations within credit risk assessment and investment processes.
• Of the 26 research providers assessed, only eight have quantitative capabilities with respect to natural capital risk.