Natural Capital Finance Alliance

Negative externalities such as Natural Capital (NC) depletion or scarcity are currently not internalized as risks by financial institutions, which represents a classical market failure. However, the financial sector increasingly considers sustainability issues and can play a transformative role given its leverage on companies. Governments and companies more and more recognize that a new approach is needed to value NC risks associated with natural resource depletion. SECO support for the NCFA is complementary and fills the gap between SECO's efforts on the government (WAVES program) and the company level (Natural Capital Coalition).

Depletion of natural resources and biodiversity can harm long-term growth, but currently, these factors are not taken into account by financial institutions (banks, insurance companies, asset managers) due to lack of know-how and a harmonized methodology. According to market mechanisms, putting a price on NC risks would allow to internalize these negative externalities, which in turn would influence the demand for sustainable investments (e.g. Green Bonds) and approaches (e.g. cleaner production). Therefore, financial institutions taking into account NC risks and adjusting the price of capital in lending and investment accordingly, will finally set economic incentives for companies to produce and act more sustainably.

By supporting the NCFA initiative, SECO aims to contribute to sustainable and resilient growth at the global level and specifically in some of its natural resource-rich priority countries.

The outcome objective of the industry-led NCFA is to develop a harmonized and tested methodology for quantifying natural capital risks in the financial sector by 2020. Financial institutions work in four working groups towards this objective: 1) understanding NC risks, 2) embedding them in lending products and investment, 3) accounting NC risks in their balance sheets and 4) reporting on them in the (yearly) public report.

SECO supports the work of the first two working groups with the outcome objective that FIs understand the importance of NC risks in their lending and investment portfolio and elaborate and test a methodology to quantify them. The final outcome would be more sustainable investments by financial institutions and NC risk-adjusted conditions for credits to companies.

The NCFA will also elaborate sectorial NC risk mapping in SECO priority countries, e.g. water usage in gold mining in South Africa and land use due to palm oil plantations in Indonesia.

Expected results:  

The SECO funded activities will be grouped in two phases:

Phase 1: Study with research results and draft common methodology to map natural capital risks in loan books and investment portfolios at different geographical and economic scales, with recommendations to adapt data/techniques to take sector, country- or region-specific factors into consideration where relevant and feasible.

Phase 2: 1) Tested and developed draft methodology to monitor risks associated with natural capital impacts and dependencies at a portfolio level. 2) Developed methodology and guidance to embed natural capital considerations into credit risk assessment.

The final methodologies will be made available for all interested FIs through outreach efforts (public good).

Phase 1 01.04.2015 - 31.12.2020   (Completed)