Integrating Natural Capital in Risk Assessments: A step-by-step guide for banks

25th January 2019 by Emma Goring

Natural capital is a way of thinking about nature as a stock that provides a flow of benefits to people and the economy. It consists of natural capital assets such as water, forests and clean air that enable economic activity by providing businesses with materials, inputs to production, protection from natural disasters and absorption of the pollution they emit.

Any adverse change in a natural capital asset can have a negative effect on the businesses that depend on it; in much the same way as the impairment of a conventional asset might affect the cashflows of the business owning it.

The portfolios of financial institutions are exposed to these natural capital risks that affect the businesses that they lend to, insure or invest in. By focusing on risks to businesses resulting from environmental degradation, rather than on the businesses’ environmental impacts which have traditionally been the focus of environmental risk assessment, natural capital risk analysis allows financial institutions to see the risks that they are exposed to in a new light.

The Natural Capital Finance Alliance (NCFA) has developed a process that enables financial institutions to easily assess natural capital risks in their portfolio. This rapid natural capital risk assessment process focuses on identifying the ways in which businesses depend on the environment, how these dependencies are threatened by environmental change, and the resulting risks for financial institutions.

This report provides a step-by-step guide for conducting a rapid natural capital risk assessment, with links to additional online resources. The guide was developed based on experience piloting the approach with banks across three countries: Colombia, Peru and South Africa. By using this approach to understand their natural capital risk, banks will be better equipped to devise solutions that will protect their portfolios in an era of accelerating environmental change, as well as to identify potential opportunities around solutions provision and new products.

Read the full guide here: