NCD Scoping Study: Towards Including Natural Resource Risks in Cost of Capital
This NCD report charts the pathway towards mapping and integrating natural capital risk factors in the financial sector.
The report entitled ‘Towards Integrating Natural Resource Risks in Cost of Capital, State of play and the way forward’ analyses responses from 36 financial institutions on their current approaches to natural capital risk management sheds light on the business case for the financial sector to integrate natural capital issues in investment and credit risk assessment, and evaluates the current capabilities of 26 research entities to provide relevant natural capital data and modelling capabilities suited for the financial sector.
The main findings from the report include:
– Almost half of the financial institutions see natural capital as very or extremely relevant to their core business strategy and / or portfolio risk management (a further one-third say it is moderately relevant).
– Over 75% of the financial institutions surveyed said they monitor natural capital risks at a transaction level. The next most popular approach was with regards to natural capital considerations in the due diligence / lending / investment processes at a portfolio level.
– Although 42% said they take natural capital factors into account in credit risk assessments, there are no standardised methodologies available and/or in use to enable systematic quantification of these risks. Hence the important role of the NCD in addressing this gap.
– More than 80% of respondents think that a project to advance environmental risk management is an important step towards further integrating environmental risk considerations within credit risk assessment and investment processes.
– Of the 26 research providers assessed, only eight have quantitative capabilities with respect to natural capital risk
The study is available here