Global environmental change is accelerating. We hear a lot about steadily rising temperatures, but just as alarming are the diminishing populations of animals, the plastics filling our oceans and the rapid deforestation that are degrading nature’s ability to replenish itself.
Given its place at the top of the economic food chain, the finance sector ought to be taking urgent action. From footwear to farming, hydropower to hotels, our economic prosperity relies entirely on a renewable provision of benefits and services from nature.
So why has the finance community largely neglected the severity of the risk from the depletion of natural capital? Part of the answer is that even the most forward-thinking financial institutions have not had the right tools to identify, quantify and manage these risks.
That changed this week with the launch of the Natural Capital Finance Alliance (NCFA) ENCORE tool (Exploring Natural Capital Opportunities, Risks and Exposure). ENCORE enables financial institutions to visualise the dependencies of each economic sector on natural capital assets, region by region around the world.
For example, it shows how sectors like mining are reliant on groundwater provision and highlights the oil & gas sector’s dependence on bio-remediation – nature’s armies of microbes that clean up contaminated soil and groundwater.
If ENCORE succeeds in changing the way financial institutions consider and act on natural capital issues the consequences for Financial Directors will be significant.
Plugging nature into financial decision-making
To create ENCORE, the Alliance, in partnership with the UN Environment World Conservation Monitoring Centre, has mapped all 167 sectors of the economy to the ‘ecosystem services’ on which they rely – such as water, raw materials, healthy soils and pollination. It then analysed the main drivers of change affecting underlying natural assets, and assessed material impact.
An analysis of the FTSE 100 using information in ENCORE shows that 13 of the sectors in the index, representing a total of $1.6 trillion in market capitalisation, are associated with production processes that have high or very high material dependence on nature. These sectors are most exposed to economic disruption as depletion of nature accelerates.
The tool makes it easier for financial analysts to weigh not only the traditional financial risks and opportunities that a company might face, but also the material challenges it faces from natural capital depletion.
A watershed moment
This month the UN Biodiversity Conference brought together more than 190 countries and called for more urgent action to stem the loss of biodiversity globally.
The arrival of ENCORE makes natural capital risk visible to the capital markets in a meaningful way, enabling them to play a vital positive role.
Financial institutions are not only exposed to risks from environmental degradation, they are also uniquely positioned to invest in solutions for the future. If more financial institutions begin to assess how environmental changes might affect their portfolios, it will be good news for the environment and the economy.