Corporates 'set to lose $1.6trn' without action on natural capital
FTSE100 firms face collectively losing $1.6trn of market capital if they fail to adopt a natural capital approach to decision-making, by assigning a monetary value to natural resources.
That is a key conclusion of new research by the UK’s Natural Capital Finance Alliance (NCFA), which uses a new digital tool it has developed to help investors quantify how much the companies they lend to or invest in depend on natural resources such as forests, oceans and clean air.
The body, which is jointly managed by the UN Environment Programme Finance Initiative and non-profit Global Canopy, used the technology to analyse how much FTSE100 firms stand to lose if they maintain their current negative environmental impacts on planetary resources.
Of the 18 sectors covered by the FTSE100, the study found that 13 were associated with production processes that have high or very high material dependence on nature, putting them at a collective risk of losing more than $1trn in market capital by 2030. These sectors include oil and gas, agriculture, aquaculture and forest products.
In order to mitigate this risk, the NCFA is urging corporates to integrate ecosystem-oriented management with economic decision-making and development by placing a financial value on natural resources. It is also encouraging investors to use its new tool, called ENCORE, to make more informed decisions on where they choose to invest.
“From footwear to finance, hydropower to hotels, our economic prosperity relies on a renewable provision of benefits and services from nature,” Global Canopy’s executive director Niki Mardas said.
“As ecosystems are increasingly degraded by threats like deforestation or pollution, financial risks grow too. Now, ENCORE enables financial institutions to zoom in on areas of natural capital concern or opportunity in their portfolios, delivering more fully than ever before on the E of ESG.”
The launch of the ENCORE tool, which was made available to the public today (26th November), has been welcomed by several financial firms including UBS, Citi and YES Bank.
The world’s total natural capital was valued at £53trn by the United Nations Environment Programme in 2010, with numerous reports having emerged since then presenting the potential benefits of adopting a natural capital approach.
Technical services firm AECOM, for example, recently stated that UK firms are missing out on a £7bn windfall by ignoring natural capital, while the Aldersgate Group has called on the UK Government to support businesses investing in natural capital.
Big-name companies to have adopted a natural capital approach in recent times include Dow, which reportedly generated almost £90m ($120m) by placing an economic value on natural resources in 2017, and luxury fashion group Kering, which uses a biodiversity metric in all decision-making processes.
Despite rising interest in natural capital concepts, some experts have suggested that natural capital accounting can be a "disaster" for sustainability professionals and an ineffective way of engaging the finance community with environmental issues.
No more turning a blind eye
In related news, the Institutional Investors Group on Climate Change (IIGCC) has released a guide for businesses looking to adopt a scenario analysis approach to climate risk, in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Published on Thursday (22 November), the guide aims to support investors in using scenario analysis to understand how different climate scenarios could affect future returns and identify new investment opportunities.
The guide launch comes after TCFD co-founder and Bank of England boss Mark Carney revealed in April that none of the financial firms to have backed the body’s recommendations had undertaken scenario analysis of their own operations.
IIGC’s chief executive Stephanie Pfeifer said the guide would help investors “close their climate risk blind-spot”, mitigating risks borne from increasing global temperatures and rising levels of plastic and air pollution.
“Many benefits of scenario analysis for investors come through undertaking the process, experimenting with methodologies and learning about the ways in which climate change drives financial impacts,” Pfeifer said.
“For some investors, the exercise can affect strategic asset allocation. For others, it is about evolving their understanding of risk and opportunity for parts of their portfolio.”