• Natural Capital Declaration
  • Natural Capital Declaration
  • Natural Capital Declaration
  • Natural Capital Declaration
  • Natural Capital Declaration
  • Natural Capital Declaration

Working Group II: Integrating natural capital into financial products and services

Working Group 2: aims

 

This working group aims to develop methodologies to enable financial institutions to integrate natural capital considerations into the decision-making process of all financial products and services – including in loans, investments and insurance. It will develop instruments (tools, metrics, principles and/or frameworks) to embed natural capital considerations into financial products and services to drive more efficient financial decision-making.

 

Chair: Marcos Mancini, Banorte
Vice-Chair: Gabriel Thoumi, CFA, Calvert Investment Management, Inc.

The NCD Secretariat oversees all projects in Working Group 2.

 

Working Group II members (as of July 2015):

 

Signatories (financial institutions)

Althelia Ecosphere
Banorte
Calvert Investment Management, Inc.
CDC Climat
CI Banco
Financiera Rural
FIRA Banco de Mexico
First Green Bank
Fundacion Social
IFC
Infraprev
MN
National Australia Bank
Nedbank
Pax World Management
RobecoSAM
Standard Chartered
Sumitomo Mitsui Trust Holdings
UniCredit
Yes Bank
VicSuper

 

Supporters (non-financial institutions)

ASrIA – Association for Sustainable and Responsible Investment in Asia
CBD
Bloomberg
Clarmondial
Conservation International
EIRIS – Responsible Investment and ESG Research
GIZ
Global Footprint Network
International Institute for Sustainable Development (IISD)
Maplecroft
Natural Capital Coalition
SPVS Brazil – Sociedade de Pesquisa em vida Selvagem e Educação Ambiental
Trucost
UK SIF (Social Investment Forum)
WWF

 

Structure and projects to support integration

 

Two work streams are created to focus on R&D to develop practical methodologies and tools to address natural capital risks and catalyse opportunities to conserve biodiversity and ecosystems.

 

Work stream 1 (led by Marcos Mancini): Risk management and performance improvement

The integration of natural capital into processes such as credit risk assessments to inform the development of products and services provided to sectors most exposed to impacts and dependencies on natural capital, as identified through research and consultations. This can inform the development of features that aim to reduce risk, enhance the resilience of portfolios, allocate capital more efficiently, and correct market failures.

Pilots projects provide a collaborative space for financial institutions to contribute to R&D and test the feasibility of instruments developed, in other words, financial products or services that embed natural capital. The pilots are developed in partnership with participating NCD signatories in collaboration with, and through support from, Working Group 2 members and other multidisciplinary stakeholders.

Current projects

  1. Soft Commodity Forest-risk Assessment (SCFA) Tool: An analytical framework was developed by the NCD, in partnership with Sustainalytics. It enables banks, investors and other financial institutions to take action by using the tool to inform, develop, update or improve their risk policies for three soft commodities: soy, beef and palm oil. Financial institutions are encouraged to identify how they can improve their risk policies to systematically consider deforestation risk in commodities value chains.This tool and an accompanying report were commissioned by the UN REDD Programme

 

 

  1. Corporate Bonds Water Credit Analysis Tool: This tool is being co-developed by the NCD, the German International Cooperation (GIZ) and the German Association for Environmental Management and Sustainability in Financial Institutions (VfU) to build capacity to integrate water-related financial risks into credit risk assessments in the Beverages, Mining and Power sectors. The Excel-based tool to evaluate corporate bond exposure to water stress has been developed and tested in partnership with seven banks and fund managers across Europe, the US and Latin America: Bancolombia, Banorte, Calvert, Pax World, Robeco, J Safra Sarasin and UBS. Expert Council members including Cate Lamb, CDP Head of Water; Archie Beeching, Principles for Responsible Investment; Mike Wilkins, Standard & Poor’s; Professor Dolf de Groot, Wageningen University; and Paul Reig, World Resources Institute.

 

The project was commissioned by the German Federal Ministry for Economic Cooperation and Development (BMZ).

 

Pipeline of projects

  1. Environmental stress testing of bank lending portfolios

UNEP FI and Global Canopy Programme are working on a proposal together with the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) Emerging Markets Dialogue on Green Finance for a joint GIZ/Natural Capital Declaration project to build capacity for banks to evaluate exposure to environmental or natural resource shocks such as drought in loan books. The current scope of the proposed project is to develop a methodology and guidance for stress testing of corporate lending portfolios, using science-based scenarios with parameters for shocks to specific natural resources (e.g. water). The project will include macroeconomic modelling of economic effects of environmental shock for 5-10 specific sectors each in 4-5 countries/regions (focusing on most relevant emerging markets in terms of size and vulnerability). Financial institutions operating globally and in regions including Brazil, China, India and Mexico will be invited to test the application of the guidance to evaluate the efficacy of the methodology to identify exposure to risks in relevant sectors and markets at portfolio level.

Financial institutions interested in finding out more about the project should contact NCD Programme Manager at info@naturalcapitaldeclaration.org

  1. Mapping natural capital risks across portfolios and embedding them in credit risk assessment

This project aims to work with NCD signatories over 2.5 years from 2016 to 2018 to develop to integrate natural capital factors 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.

 

Project objectives under phase 1 to map natural capital risks across portfolios come under Working Group 1. Under phase 2 in WG2, the NCD will develop approaches to embed natural capital considerations into credit risk assessment. Under each phase, two work streams (banks and investors) will ensure customized approaches for different asset classes. The intended outcomes are for to enable financial institutions to better understand how key natural capital performance indicators translate into credit risk; 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). See project page here.

Financial institutions interested in finding out more about the project should contact NCD Programme Manager at info@naturalcapitaldeclaration.org

Work stream 2 (led by Gabriel Thoumi, CFA): Opportunities
This finance hub aims to support the development of innovative financial instruments, thematic financial products and impact investing to create opportunities for more environmentally-efficient outcomes and the better management of natural capital.

Current projects
The State of Art in Natural Capital Finance

The NCD is currently conducting a scoping study to assess options for projects to integrate natural capital into products and services under the “opportunities” work stream. The study aims to provide an overview of how the financial sector is approaching embedding natural capital into products and services. It will assess current approaches, tools, metrics, and processes used by financial institutions to develop natural capital-related opportunities across asset classes; compile information on how natural capital can be integrated in financial products and services (e.g. impact investing, thematic products, green bonds, natural infrastructure financing); provide an overview of how financial products and services are currently designed to provide sustainable finance, highlighting gaps and challenges; identify potential to develop financing opportunities to support objectives under the Convention on Biological Diversity (Aichi targets) and Sustainable Development Goals and Sustainable Stock Exchange Initiative, as well as public policy mechanisms aimed at leveraging finance sector financing to meet natural capital-related objectives; and provide recommendations for pilot projects, focusing on specific types of financing for banking, asset management and insurance/reinsurance. This aims to start work to help build the capacity of innovative financial institutions and enable knowledge sharing with mainstream banks and fund managers to see the upside benefits and to innovate potential new financial products. Pilot projects should be designed to provide additional insight to catalyse innovation and/or scale up opportunities linked to natural capital financing.

 

This study was commissioned by the Gordon & Betty Moore Foundation.