Finance firms must adopt a natural capital approach to risk, PwC warns
In the face of climate challenges, most financial service providers are still failing to assess the extent to which environmental degradation could pose financial risks to their firms, PwC has warned.
While banks have made progress to disclose environmental risks relevant to their businesses most are failing to assess the sustainability of their entire portfolios, a new joint report from the professional services giant, published on Thursday (17 January), has concluded.
Produced in collaboration with the Natural Capital Finance Alliance (NCFA), the United Nations Environment Programme (UNEP) and anti-deforestation NGO Global Canopy, the report warns that most finance firms are overlooking how events like droughts, floods and heatwaves can put their borrowers’ operations at risk.
In order to overcome these issues, big-name finance companies should adopt a natural capital approach, the report concludes. Such an approach integrates ecosystem-oriented management with economic decision-making and development by placing a financial value on natural resources.
“By focusing on risks to businesses resulting from environmental degradation, rather than on the businesses’ environmental impacts - which have traditionally been the focus of environmental risk assessment - natural capital risk analysis allows financial institutions to see the risks that they are exposed to in a new light,” the report states.
In a bid to help financial firms adopt this natural capital approach to risk, PwC has included a step-by-step guide in the report. The tool, which comprises a four-step approach to placing a value on nature, is being trialled by Colombia, South Africa and Peru ahead of the World Economic Forum event next week.
Specifically, it recommends that banks, investors and pension schemes achieve internal buy-in for a natural capital approach before mapping existing environmental risks within their portfolios. It goes on to urge such firms to identify which kinds of environmental disruption are most material to their operations.
“Given the increasing erosion of natural capital and the increasing risks that businesses and their financiers face, this report is a timely addition to the tools available to risk managers,” PwC UK’s sustainability and climate change partner Jon Williams said.
The publication of PwC’s report comes shortly after luxury fashion company Kering called for businesses to adopt a ‘planetary boundary’ approach to sustainability, in order to ensure their well-intentioned actions are not contributing to global issues such as resource scarcity, water stress or rising carbon emissions.
As part of a partnership with the Cambridge Institute for Sustainability leadership (CISL), the company, which owns brands such as Gucci and Balenciaga, has developed a framework which enables businesses across all sectors to link decision-making processes to wider natural resource limits.
Published on Wednesday (16 January), the framework can be used to measure business impacts on both global and local ecosystems. It accounts for nine different kinds of environmental degradation which have, historically, been caused by corporate action, including land-system change and excessive freshwater use.
“The planetary boundaries framework is a fundamental element to include when designing the agenda for managing and mitigating our global environmental challenges,” Kering’s chief sustainability officer Marie-Claire Daveu said.
“As businesses, we need to go far beyond our single, individual issues and contribute to meaningful change at a global level.”
A new kind of accounting
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.
Kering is one of several big-name companies to have adopted a natural capital approach to finance and risk in light of this finding, along with the likes of Dow Chemical Company and home improvement retailer Kingfisher.
The fashion firm uses a biodiversity metric, developed as part of a partnership with companies including Mars and Asda, to help translate the less tangible benefits of biodiversity impact to its internal decision-makers and external investors.
Similarly, Stella McCartney publishes environmental profit and loss (EP&L) accounts, which place a monetary value on the environmental costs and benefits that the company has generated by its direct operations and across its entire supply chain, covering sourcing, manufacturing and selling practices.
But 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.