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Natural Capital

Why should I, as a financial institution, take natural capital into account?

Natural capital is a material concern for financial institutions: risks are hidden in the value chains of many clients of banks, investors and insurers. Integrating natural capital in decision-making allows for better risk management and is financially more attractive. Finally, the transition to a green economy is capital-intensive – financial institutions have a necessary role to play.

Natural capital is material for financial institutions

Increasing pressures on natural resources in the past decade alone has reversed a 100-year decline in resource prices. Reduction in water quality, scarcity of water, loss of species and degradation of ecosystems are material not only to project finance, but also to asset classes such as fixed income, public and private equity and debt, as well as various insurance lines.

Natural Capital Declaration (2013), p. 5.

Risk management

For banks, investors and insurers many risks are hidden in supply chains of their clients. Clothing company H&M already faces increasing prices for cotton for its products due to water shortages, which could be a problem if such costs cannot be passed on to customers. Unilever estimates that climate change is leading to a net cost to the company of around $265 million annually. Another risk for financial institutions concerns reputation. The value of biodiversity and ecosystem services is increasingly accompanied by media attention, empowerment of local populations, activism by non-governmental organizations (NGOs), and heightened sensitivity of international consumers to environmental, social and governance concerns. A damaged reputation may adversely affect the ability of financial institutions to attract clients or affect their credit ratings.

Natural Capital Declaration (2013), p. 5.

DB Climate Change Advisors (2012), p. 27 & 36.

A better return for sustainable investments

Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. Both on an absolute and a risk-adjusted basis, across asset classes and over time.

Morgan Stanley (2015), p. 1.

A need for capital

The green economy will require a capital-intensive transition, with investment in new skills, institutions and technologies replacing resource use and pollution. Up to US$ 6 trillion a year is needed to 2030 for cleaner and more resilient energy, water, transport and urban infrastructure.

UNEP (2015), p. 1.