3. 3
The business case for valuing natural capital
Natural capital is defined as the world’s stocks of
natural assets, which include geology, soil, air, water
and all living things, that yield a renewable flow of
goods and services and provide a range of direct
and indirect benefits to businesses and society.
Although natural capital underpins economic
prosperity and human life, it is often not adequately
valued by society.
Academic studies have estimated the total value of
global ecosystem services at over US$125 trillion
per year.1
But there has been a marked decline in
natural capital in 116 out of 140 countries, with
projections suggesting that a further 10% of global
natural capital will be eroded by 2030.2
Financial institutions, businesses, and policy-makers
are becoming increasingly cognizant of natural
capital’s role in the economy and society, and the
risks of neglecting its value. We see this in the 2015
Paris Climate Accord to limit global temperatures to
2°C above pre-industrial levels, the UN Sustainable
Development Goals, and the New York Declaration
on Forests.
The business case for understanding the
implications of this trend is two-fold:
1. Recognising, measuring, and understanding
the dependencies and impacts of natural capital
as an integral part of the economy, rather than
as a separate function, thus providing a better
foundation to manage risks;
2. Meeting growing demand for environmentally
sustainable products and services, both from
consumers and in response to new government
regulations, which provide opportunities.
There are currently no uniform global approaches
financial institutions can use to systematically
consider natural capital in the provision of
investment, lending and insurance products and
services. Led by financial institutions, the NCFA is
addressing this gap by developing models, tools
and approaches that enable the sector to better
understand – at the asset and portfolio levels—their
dependence and impact on natural capital.
1. UNEP Inquiry, The Financial System We Need, Aligning the Financial System with Sustainable Development, October 2015
2. Ibid.
3. 2030 Water Resources Group, Charting our Water Future, 2009
4. http://wwf.panda.org/wwf_news/?244770/Ocean-wealth-valued-at-US24-trillion-but-sinking-fast
5. http://www.fao.org/sustainable-development-goals/en/;
In numbers...
• The economic value of freshwater is
valued at $73.5 trillion annually3
• Fish stocks are estimated to contribute
$2.5 trillion annually to the global
economy4
• Forests provide more than $1.5 trillion
directly through forestry and indirectly
by providing energy, food, shelter,
medicine, soil and water conservation,
desertification control and carbon
storage5
4. 4
Our mission
The Natural Capital Finance Alliance (NCFA), co-
convened by the UN Environment Finance Initiative
(UNEP FI) and the Global Canopy Programme (GCP),
is a growing alliance of financial institutions that
are collaborating to understand the importance of
integrating natural capital-related considerations
into their activities as described by the Natural
Capital Declaration (NCD).6
It is our mission to advance the financial sector in
integrating natural capital considerations within
financial products and services, to better understand
risks, pursue opportunities, and establish the
foundation for resilient long-term economic growth
that protects nature and societies.
Our models do not aim to put a price on nature.
Instead by quantifying the risks that clients or
investee companies face from their impact and
dependency on nature, we enable financial
institutions to better understand the value nature
provides. Depletion and degradation of nature
constitute risks to growth and resilience, while
protection of nature offers opportunities for
prosperity and innovation.
- Julie Gorte
Senior Vice President, Sustainable Investing
Pax World
- Simon Connell
Senior Manager, Risk Framework and Engagement
Standard Chartered
The NCFA is working on standardised
methodologies to quantify the natural capital-
related inputs to the economy in order to improve
decision-making in the finance sector, by addressing
four core questions:
1. How is natural capital relevant to the
financial sector?
2. What should be taken into consideration
and what are the emerging and potential
capacities to monitor and manage natural
capital risks and opportunities?
3. How can natural capital-related dependencies
and impacts be integrated into financial
products, services, accounting and reporting
while safeguarding the benefits of natural
capital assets?
4. How can the financial sector facilitate an
orderly capital shift to support the transition
needed to achieve the SDGs and UNFCCC
COP21 climate commitments?
6. The Natural Capital Declaration was launched at the UN Conference on Sustainable Development (Rio+20) in 2012. It has been signed by the CEOs of
more than 40 financial institutions, and demonstrates their commitment to the integration of natural capital considerations into private sector reporting,
accounting and decision-making by 2020.
The NCFA is developing the tools and methodologies that financial
institutions will all be using in 10 years’ time.“
”
Quantifying natural resource and environmental risk factors can
provide the financial sector with an opportunity to make a significant
breakthrough in risk management practices.
“
”
5. 5
Projects
With financial institutions’ expertise and with
the support of donors, the NCFA has developed
practical applications to manage risk and identify
opportunities across natural capital assets such as
water and forests.
Water risk management tools
Increasingly, companies are finding it challenging
to access sufficient quantities of water for critical
business operations. The costs of securing
water inputs are already rising for water-
intensive companies in locations vulnerable to
water shortages. Since 2011 companies have
spent more than $84 billion7
worldwide on
conserving, managing and obtaining water – a
number projected to rise as climate change and
demographic pressures affect water supply and
demand. There are also business opportunities, for
example, 55 different solutions have been identified
to help address water availability in China that
would also result in $US 21 billion in savings8
.
It is therefore critical for financial institutions
to manage the risks associated with companies
exposed to water scarcity and to identify the
opportunities.
Bloomberg water risk valuation tool
In September 2015 Bloomberg and NCFA launched
the Water Risk Valuation Tool (WRVT), enabling users
to incorporate water risks into company valuations
across copper and gold mining companies.
The tool provides a quantitative approach to
evaluate how water risk factors can be incorporated
into company valuations using a discounted
cashflow model. The scenario directly links water
risk to revenue, while an optional social cost of
water (shadow price) can be accounted for in
operating expenses.
The tool builds on Bloomberg’s Carbon Risk
Valuation Tool and maps specific mine asset
locations and production volumes against water
stress indicators provided by the World Resources
Institute (WRI) Aqueduct water database.
- Su Gao
WRVT project manager and Senior ESG Analyst
Bloomberg
Corporate bonds water credit risk tool
The Corporate Bonds Water Credit Risk Tool
provides investors with a systematic and practical
approach to assess water risk in corporate bonds
and benchmark companies against sector peers,
taking account of projected changes in water
availability to 2040.
7. Global Water Intelligence
8. Charting Our Water Future: Economic Frameworks to Inform Decision-Making, McKinsey 2016
The tool is powerful in that it
does not require the user to
have any specific expertise
or additional datasets – it
is ‘plug and play’ with the
Bloomberg terminal to help
users conduct research in an
easy, cost effective way while
retaining a detailed profile of
the valuation impacts due to
water risk factors.
“
”
6. 6
Projects
Developed through a partnership between the
NCFA, the Deutsche Gesellschaft für Internationale
Zusammenarbeit (GIZ) and the German Association
for Environment and Sustainability in Financial
Institutions (VfU), the Corporate Bonds Water Credit
Risk Tool enables users to integrate financial risk
exposure to water scarcity into standard financial
models used to assess the credit strengths of
corporations across water-intensive sectors.
The tool currently covers 24 companies and provides
a model to allow users to add their own companies
and analyses in order to address the information
gap in traditional financial analysis. It enables
analysts to identify companies that depend heavily
on access to water in locations that are exposed to
water stress and to quantify the potential impact of
water scarcity on the company’s creditworthiness.
Forest risk management tools
Financial institutions are exposed to risks from
deforestation by financing companies whose
activities contribute to deforestation and forest
degradation through their operations or soft
commodity supply chains.
The NCFA has developed the Soft Commodity Forest-
risk Assessment (SCFA) tool with Sustainalytics
to reduce the deforestation risk caused by the
unsustainable production, trade, processing and
retail of soft commodities, especially soy, palm oil
and beef. The production of these commodities
drives deforestation and forest degradation in
tropical forests.
Financial institutions are encouraged to identify how
they can improve their own lending and investment
risk policies to systematically consider natural
capital in the credit policies of specific sectors,
including commodities, that may have a major
impact on natural capital either directly or through
the supply chain.
Environmental risk management
tools
In October 2015, the NCFA launched its project on
environmental risk management with support from
the Swiss State Secretariat for Economic Affairs
(SECO) and the MAVA foundation.
The Advancing Environmental Risk Management
(AERM) project aims to catalyse sustainable
investment and lending globally by reducing risks
from environmental and natural resource pressures.
The objective is to develop methodologies and tools
to map natural capital risks across lending and
investment portfolios with the aim of embedding
them in credit risk assessments.
The project supports the development of global
methodologies to quantify risk, with additional
focus on emerging markets such as South Africa,
Indonesia, Colombia and Peru.
7. 7
- Courtney Lowrance
Director, Environmental and Social Risk Management
Citi
Join us
Join us to help establish the foundation for
resilient long-term economic growth.
The NCFA provides a forum for financial institutions
to work together and develop standardised
methodologies and structured approaches to
quantify natural capital inputs and externalities.
Supporters of the NCFA share emerging knowledge
in order to inform better decision-making and to
strengthen the capacity to embed natural capital
considerations.
• Contribute expertise or provide practical
feedback on NCFA projects and tools
• Join our network and work with supporters and
aligned organisations to drive awareness
• Sign the Natural Capital Declaration (financial
institutions)
• Partner with us to encourage wider integration
of natural capital in the finance sector
• Become a donor and support the work of the
NCFA
Demonstrate leadership Ways to get involved
We are proud to join the Natural Capital Declaration to deepen this
work of integrating natural capital considerations into our work.“
”
8. 8
For more information visit
www.naturalcapitalfinancealliance.org
or contact us at
info@naturalcapitalfinancealliance.org
