NCFA Pilot Project to advance environmental risk management in the financial sector
Mapping natural capital risks across portfolios and embedding them in credit risk assessment
This project aims to work with Natural Capital Declaration signatories and NCFA supporters to develop the business case, approaches, and tools to integrate natural capital into financial institutions’ operations from the lending and investment risk perspective, thereby strengthening the financial health of portfolios while contributing to the broader agenda of resilience in the financial sector.
- 1. Develop evidence-supported business case for natural capital
as a material risk for financial institutions.
- 2. Identify approaches and methodologies for evaluating natural
capital risks across the portfolios of financial institutions.
- 3. Develop approaches to embed natural capital considerations
into credit risk assessment.
The project consists of two inter-connected phases that support the objectives of NCD Working Groups 1 (understanding) and 2 (integrating into financial products & services).
Phase 1 (WG1) will develop and test a methodology for mapping of risks associated with natural capital impacts and dependencies across FIs’ portfolios.
Phase 2 (WG2) will develop methodology and guidance to embed natural capital considerations into credit risk assessment.
Under each phase, two work streams (banks and investors) will ensure customised approaches for different asset classes.
Phase 1 Financial institutions are more aware of the materiality of natural capital risks they are or may be exposed to in their loans and investments – as a result of natural capital impacts and dependencies of their clients/portfolio companies – and have adequate tools to understand and assess these risks.
Phase 2 Financial institutions understand how key natural capital
performance indicators translate into credit risk; Financial institutions have access to approaches and methodologies to embed natural capital parameters into credit risk, as well as to create risk-adjusted premiums (performance-based cost of capital for investees).
Work stream 1: Commercial banks and development finance institutions
Partners: Banorte, World Bank Group, National Australia Bank, Unicredit.
Work stream 2: Institutional Investors
Partners: Calvert, The Caisse des Dépȏts Group, Pax World
Project partners have provided inputs into project design and have committed to participating in R&D and testing during the project’s implementation. Other financial institutions are welcome to join the project – there are three options to participate:
- 1. Become a full project partner to participate in project research & development and test draft methodologies/tools in relevant selected asset classes.
- 2. Join a formal technical advisory panel to provide input into needs analysis and methodology and tool development. Nominations for Financial Institution participants will be put forward to project partners and selected by the project team in Q3/4 2015.
- 3. Join a stakeholder group to be updated and consulted on methodology developments.
Expected Inputs from NCD Signatories as Project Partners
Financial institutions participating in this project will have a unique opportunity to lead innovation in approaches to help transform the way the financial sector assesses and manages environmental risks and makes investment decisions. The participating signatories will actively collaborate on this project by providing inputs and feedback. This includes collaboration to develop methodology(ies)/framework/guidance and testing them in their own operations across selected portfolios. The institutions shall communicate outputs internally and engage relevant experts, as well as share aggregated results and learning from methodology testing with other participants and, as appropriate, publicly, to enable global knowledge creation. Terms of reference for project partners are available on request.
Estimated period for implementation (subject to funding):
January 2016-June 2018
Implementation will be carried out of 2.5 years, with a view to allocating co-funding to extend the project by an additional 6 months to three years to resource activities to advocate uptake and adoption, following the launch of the methodologies and tools.