Why sign the NCD? The general case
For how to sign, and expectations of signatories, please visit our ‘How to Sign’ and ‘Expectations and Commitments’ pages.
The business case for financial institutions to lead on Natural Capital
At both macro and micro economic levels, our financial systems will need to position products and services in accordance with 21st century trends such as declining access to natural capital and the significant price volatility and business constraints that this will likely cause. Correcting price signals in the world economy to address the hidden and external costs of doing business will be increasingly pertinent to credit risk, future-proofing investment returns and making the insurance industry resilient to a changing operating environment. By integrating natural capital into operations, signatories to the Declaration will manage their own institutional exposure to risks and opportunities through indirect impacts and dependencies on natural capital and be able to quantitatively account for these risks and opportunities in their portfolios in relation to companies that they lend to or invest in.
Financing for sustainable competitive advantage
Almost 200 countries supported the Rio+20 “The Future We Want” Outcome document that recognises the need to prioritise sustainable development in resource allocations. This calls for financial mechanisms to be strengthened to support the implementation of sustainable development programmes, and encourages the exploration and use of new partnerships and innovative sources of financing to play a role in complementing sources of financing for sustainable development. Financial institutions that seize the opportunity to advance sustainable development goals will be better positioned for changing environmental, social and economic conditions. Prepare to help deliver a green economy and a sustainable development financing.
Credit risk from resource constraints and environmental impacts
Financial institutions need to prepare for economic uncertainties driven by declining access to natural capital and resource insecurity. Access to natural resources and environmental degradation are increasingly material to business risks and opportunities. Through the NCD they can help address the financial sector’s systemic exposure to the hidden and external costs of business and decrease their exposure to financial, regulatory and reputational risk.
Surging demand in the past decade has reversed a 100 year decline in resource prices . Increased demands on agricultural production, as well as associated water and energy requirements, from feeding an additional billion people by 2030 will put additional upward pressure on commodities prices. These predicted increases will increase margin pressure on downstream business as costs are passed through supply chains, affecting credit risk and returns well within the investment horizon of pension funds and many loans.
Develop capabilities and demonstrate leadership on green economy
NCD signatories and supporters will share resources, knowledge and expertise to develop leadership on natural capital management in financial services.
Develop products and services that help deliver green growth.
Support financing of options that reflect natural resource constraints (e.g. water, soil, land).
Support the development of financial mechanisms to develop climate-resilient, low-carbon infrastructure, operations and supply chains.
Innovate, in collaboration with other financial institutions, to mobilise financial mechanisms that support the biodiversity and ecosystem services goals of agreements under the Convention on Biological Diversity.
Strengthen accountability and transparency
Prepare for a greater focus on accountability across banks and investors, by supporting the development of a common approach to environmental accounting and reporting in the financial sector.
Develop natural capital accounting and reporting and help shape international best practice to monitor the performance across value chains.
Demonstrate accountability and transparency on the environmental impacts and dependencies of disbursements.
Build capabilities to understand natural capital impacts and dependencies in the context of Integrated Reporting.
What different types of financial institutions stand to gain
Institutional investors / investment banks
1. Understand how the value of bonds, equities and other assets are exposed to financial risk from natural capital issues.
2. Manage exposure to stranded assets and unanticipated falls in the value of securities due to environmental challenges.
3. Enhance due diligence in capital allocations in line with fiduciary duties.
4. Universal Owners can develop capabilities to address risk of a net loss from cumulative portfolio-wide systemic environmental risk.
5. Prepare for more uncertain, rapidly changing conditions in capital markets driven by depleted natural capital.
6. Reducing environmental impacts and dependencies of portfolio companies is in the interests of beneficiaries.
7. Develop expertise to assess fund managers on their ability to manage the risk of lower dividends due to reduced cash flows for companies exposed to or causing damage.
8. Create an enabling environment for asset managers to take account of environmental information and improve market efficiency.
9. Provide a signal to investment managers and consultants to incentivise capacity building for responsible investment on environmental factors.
1. Prepare for mandates with criteria on environmental management.
2. Develop products and services that build natural capital resilience into capital allocations in order to reduce risk and protect future fund returns.
3. Keep ahead of ratings agencies in understanding how natural capital factors are material for different types of securities and different sectors.
4. Build knowledge and expertise to prepare for ratings methodologies that incorporate environmental risk into credit risk assessments.
5. Work with peers across financial sub-sectors to develop expertise around policies, systems and practices to overcome market failures.
6. Develop metrics and apply tools in line with peer-reviewed methodologies to integrate natural capital factors into risk management and securities valuations.
7. Provide your organization with access to resources that can help meet responsible investment commitments.
8. Engage with peers to develop resources that support management, monitoring and reporting on environmental, social and governance (ESG) issues.
9. Build capacity to integrate environmental issues into investment analysis and decision-making, including engagement or proxy voting activities under initiatives such as the UN-backed Principles for Responsible Investment (PRI).
1. Address credit risks from businesses and projects that are at risk from lower cash flows and loss of license to operate due to resource-intensive or polluting activities in operations or supply chains.
2. Reduce exposure to unanticipated risk and cash flow fluctuations from underlying resource scarcity, commodity price volatility, and loss of market share.
3. Manage reputational risks from financing sub-optimal corporate environmental performance and damaging practices.
4. Access a global knowledge base and emerging good practice to develop more secure credit finance.
5. Enable your organization to work with peers to build an understanding of sector-specific corporate exposure to risks in operations and soft commodities supply chains to create more resilient loan books.
6. Access a platform to develop accepted methodologies to underpin new financial products and services designed for long-term value creation.
7. Build stronger client relationships and more sustainable business.
8. Gain market share in financing of companies that are well positioned to withstand the negative side-effects of macro-trends such as growing resource demand, urbanisation and industrialisation.
9. Enhance transparency and develop evidence-based environmental credentials.
Development banks/Multilateral financial institutions
1. Enable your organization to collaborate with international peers to integrate natural resource and pollution issues into financial instruments, policies, practices and evaluations.
2. Build capabilities to help implement national commitments under the Rio+20 “The Future We Want” Outcome document that recognises the need to prioritise sustainable development in capital allocations.
3. Explore and use new partnerships and innovative sources of financing to play a role in developing sustainable finance.
4. Prepare to finance the delivery of international Sustainable Development Goals around integrating environmental and water issues into policies, plans and actions from 2015 onwards.
5. Mobilise capital allocations that support the biodiversity and ecosystem services goals of agreements under the Convention on Biological Diversity.
6. Finance the maintenance of stock of ecosystems that yield a renewable flow of environmental goods and services that underpin your economy and trade.
7. Strengthen your organization’s role in financing changes in extraction, production and infrastructure to support society’s need for access to clean air, water, land, energy, affordable food and climate security.
8. Build capabilities to help implement national and regional policies and initiatives. E.g., Environmental policies, environmental markets and resource security.
9. Help address the financial sector’s systemic exposure to the hidden and external costs of business and decrease their exposure to environmental liability and potential losses.
10. Contribute to the development of tools, frameworks and guidance to strengthen due diligence and mechanisms to manage the exposure of customers to environmental challenges.
11. Demonstrate international leadership by helping to develop innovative products and services that contribute to green growth.
12. Build capabilities to evaluate your own institutional risks from natural resource constraints.
13. Strengthen accountability and transparency through tools and frameworks that support environmental accounting and reporting across value chains.
Non-life insurers and reinsurers
1. Develop capacity to meet the Principles for Sustainable Insurance.
2. Enable your organization to learn from peers across the financial sector.
3. Contribute to the development of frameworks, tools and methodologies to align risk processes in investment management with due diligence in insurance product pricing policies.
4. Collaborate to strengthen environmental risk management in underwriting and investment practices.
5. Develop understanding of implications of resource constraints and climate change impacts for actuarial analysis and catastrophe modelling.
6. Strengthen the resilience of products and services to position your business for growing environmental pressures.
Securities and Commodities Exchanges
1. Access a platform that encompasses a range of financial sub-sectors to inform your organization’s understanding and management of environmental factors in capital markets.
2. Collaborate to build products that enable investors to deliver on NCD commitments.
3. Create benchmarks that reduce systemic market risk from water and other natural resource constraints.
4. Enable clients to reduce exposure to market volatility driven by environmental factors.
5. Develop capacities to incorporate material environmental information into indices and create more stable and efficient financial markets.
Other benefits of joining financial institutions to address natural capital challenges and opportunities
Showing leadership by signing the NCD and engaging in implementing the Roadmap will provide your organization with the opportunity to collaborate with other financial institutions globally through one or more of the four Working Groups.
The NCD provides a forum for financial institutions to create methods to systemically integrate natural resource and environmental degradation factors into risk and valuation models. Supporters can share emerging knowledge in the field to innovate and shape structured approaches to embed natural capital in financial products, accounting and reporting in collaboration with peers to build support for common international methodologies and guidance. The NCD can also provide financial institutions with access to:
UNEP FI and UN system expertise and resources on environmental issues, policymaking and science.
Resources such as studies, pilot project results, newsletters and webinars which will help to keep up to date with developments such as evidence of material natural capital risk and tools to manage financial exposure.
A global environmental finance hub to develop the thought leadership on the financial sector’s response to natural resource and environmental challenges
 McKinsey Global Institute, 2011, Resource Revolution: Meeting the world’s energy, materials, food and water needs. McKinsey & Company.