
Connecting finance and natural capital: A supplement to the Natural Capital Protocol
This supplement provides financial institutions with a framework for integrating natural capital considerations into their decision-making processes. It offers practical guidance on assessing and valuing natural capital dependencies and impacts, helping institutions manage risks and identify opportunities related to natural capital. It includes methodologies for incorporating natural capital into investment analysis, lending, and insurance underwriting, ultimately promoting sustainable finance practices.
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OVERVIEW
Orientation
The report explains how financial institutions can integrate natural capital considerations into their decision-making processes to address risks, identify opportunities, and align with broader sustainability goals. Natural capital is defined as the stock of renewable and non-renewable resources (e.g., water, air, soils, biodiversity) that provide ecosystem services essential for economies and societies. The guidance builds on Environmental, Social, and Governance (ESG) frameworks and focuses on translating natural capital insights into actionable financial decisions. Key activities include banking, investment, and insurance operations.
Frame stage (Why?)
This stage establishes the importance of natural capital assessments for financial institutions. The finance sector impacts and depends on natural capital through resource inputs, ecosystem services, and associated risks. Risks include operational disruptions (e.g., resource scarcity, increased costs due to poor yields), regulatory penalties, market volatility, and reputational damage. Opportunities arise from developing green investment products, improving portfolio resilience, and accessing new revenue streams (e.g., carbon markets).
Natural capital assessments offer insights into both direct and indirect dependencies and impacts, enhancing understanding of systemic risks and opportunities. For instance, biodiversity loss undermines services like pollination, affecting agricultural outputs and credit quality. Recommended actions include identifying material risks and opportunities, engaging stakeholders, and leveraging existing ESG processes.
Scope stage (What?)
The scope stage guides financial institutions in setting objectives, identifying target audiences, and defining boundaries for natural capital assessments. Key considerations include:
- Objective definition: Assess risks and opportunities, compare options, or evaluate net impacts.
- Target audience: Examples include internal teams (e.g., portfolio managers) or external stakeholders (e.g., regulators, communities).
- Scope determination: Decisions should address whether the focus is on individual entities or portfolios, impacts, dependencies, or both. Spatial and temporal boundaries are crucial to ensure assessments consider relevant geographic regions and timelines. Materiality assessments help prioritise significant impacts and dependencies.
Case studies highlight applications, such as a bank evaluating the impact of a gas project near a UNESCO World Heritage site or an insurer exploring climate-related risks and dependencies on natural flood defences.
Measure and value stage (How?)
This stage provides a systematic process for measuring and valuing natural capital impacts and dependencies:
- Measurement: Identify and quantify material impact drivers (e.g., water usage, GHG emissions) and dependencies (e.g., reliance on pollination or flood control).
- Valuation: Evaluate the financial and societal costs or benefits using techniques such as market pricing, replacement cost, and contingent valuation. For example, assessing the financial implications of reduced water availability or valuing biodiversity loss in monetary terms.
Outputs from this stage include:
- Comprehensive valuation data (qualitative, quantitative, and monetary).
- Records of assumptions, data sources, and methods used.
- Insights into natural capital trends and changes.
- External factors like climate change or regulatory shifts are also considered, as they significantly affect financial outcomes.
Apply stage (What next?)
The final stage focuses on using assessment results to inform decision-making and integrate findings into organisational strategies. Actions include:
- Collating results: Employ cost-benefit analyses, Environmental Profit and Loss accounts, or similar methods to synthesise findings.
- Validation and verification: Ensure accuracy and credibility through internal or external reviews and address uncertainties.
- Disseminating results: Share findings internally (e.g., with senior management) and externally (e.g., with stakeholders or regulators) to inform policies and strategies.
- Implementing decisions: Examples include prioritising investments in sustainable assets, divesting from high-risk sectors, or creating green financial products.
Case studies illustrate applications, such as a beverage company achieving water neutrality by assessing local and operational water risks or a bank making biodiversity protection a condition for project funding.