Banks pressed to evaluate risks linked to ‘natural capital’

The degradation of natural ecosystems poses a material threat to future economic growth, argue the sponsors of the report. [junaidrao / Flickr]

While the assessment of financial risks caused by climate change – like floods and storms – is becoming more widespread in the financial community, the evaluation of broader environmental risks like deforestation or ocean pollution is still a major blank spot for bankers.

Global consulting firm PwC launched a new step-by-step guide on Wednesday (16 January) to help banks evaluate the risks they face because of their dependence on nature.

The new tool, designed in cooperation with the Natural Capital Finance Alliance (NCFA), a finance sector-led initiative supported by UNEP, looks at things like ocean pollution or the destruction of forests as part of a rapid “natural capital risk assessment”.

“The degradation of natural ecosystems poses a material threat to future economic growth,” said Liliana de Sá Kirchknopf, an official at the State Secretariat for Economic Affairs in Switzerland (SECO), which contributed to funding the scheme.

“Until now, the financial community was not able to systematically assess and manage such risks. That is changing,” she added.

World’s pension funds vulnerable to climate risks, study reveals

87% of assets managed by the world’s 100 largest public pension funds are yet to undergo formal climate risk assessment, according to research published on Tuesday (23 October), with only 15% of them adopting a coal exclusion policy.

The tool has been piloted by banks in Colombia, South Africa and Peru, and is being launched ahead of the World Economic Forum (WEF) in Davos on 22-25 January.

Financial leaders “must consider not just greenhouse gases, but also how to build wider ecosystem resilience from rainforests to coral reefs,” said Niki Mardas, from Global Canopy, an environmental NGO.

With the new tool, “financial institutions can now systematically identify natural capital risks and act on them,” she said.

First Rand in South Africa was one of the five banks that piloted the scheme. The country’s second largest city, Cape Town, officially declared a water crisis in 2017 after experiencing a prolonged drought.

Cape Town shares lessons of record drought

Cape Town, South Africa’s second largest city, is experiencing its worst drought in 100 years. Gareth Morgan, trade and investment officer for the city, told that the crisis was also an opportunity to seek solutions which could be of use in other parts of Africa.

“The South African economy has a deep dependence on nature and is particularly vulnerable to extreme climatic events, which are becoming more frequent and intense. The severe challenges around the availability and supply of drinking water in Cape Town is just one example of this,” said Madeleine Ronquest, head of environmental risk and climate change at FirstRand Limited.

Natural capital risks are present in many banking portfolios but are often hard to identify, and therefore mitigate, said Jon Williams, from PwC UK. “Given the increasing erosion of natural capital and the increasing risks that businesses and their financiers face, this report is a timely addition to the tools available to risk managers,” he added.

The guide has two core elements:

  • Rapid Natural Capital Risk Assessment, which allows an institution to quickly identify the areas of highest natural capital risk.
  • Sector/Asset Analysis, which uses data on drivers of environmental change and the state of natural capital assets to assess the likelihood of disruption of relevant ecosystem services.

‘Risk data hub’ to enhance EU resilience to climate hazards

The European Commission is preparing to launch a “risk data hub” in the coming months that will help map out loss and damage from natural disasters such as floods, droughts, storms and other extreme weather events that are becoming more frequent with climate change.

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