A New Framework: Connecting Finance & Natural Capital

Photo Credit: Joshua Hoehne

Andrew Mitchell

When Mark Carney, Governor of the Bank of England warned this month of the “catastrophic impact” climate change could have for the financial system, he was referring to only one kind of natural capital, namely a clean atmosphere. But natural capital offers all kinds of services into the economy that we take for granted, such as clean water for mining, pollination for agriculture, and landscapes for tourism.

Though invisible to many banks and asset managers, a portfolio’s impacts and dependencies on stocks and flows from nature can be vast. Financial Institutions (FIs) need a way of understanding this, because ignoring nature is de-stabilising our global economy.

The “Connecting Finance and Natural Capital” report, launched in Hong Kong on 23rd April, is a guide to help FIs take a more integrated systems approach to lending and investment linked to natural capital. It has been developed over 18 months by the Natural Capital Finance Alliance (NCFA), with the Natural Capital Coalition and VBDO, the Dutch Association of Investors for Sustainable Development. Sequential launches in all the world’s major financial capitals are taking place throughout this year.

Why should FIs care about this? Well, the issues are big and are getting bigger. Take plastic for example. In 1950, the world’s population of 2.5 billion produced 1.5 million tons of plastic; in 2016, a world of seven billion people produced over 300 million tonnes of plastic, with almost 80% of it accumulating in landfills and oceans.

Plastics in oceans have hit the headlines and that should be of interest if you are in a sector linked to this. Being responsible for filling oceans with plastic nanoparticles or polystyrene foam does not go down well with Millennials, let alone fish or seabirds. 80% of oceanic pollution is now plastic; a great opportunity if you can profit from cleaning it up but a growing reputational and regulatory risk too. For producer industries and the FIs that finance them, this could become an issue as widespread as climate change.

FIs need a framework developed for and by the financial sector, to begin getting to grips with what could become an exciting new opportunity or have serious systemic consequences. Sage advice is what this NCFA report provides. It moves through framing, scoping, measurement and valuation, and application of results. It offers case studies by major banks and asset managers, including ASN Bank and BNP Paribas. The methodology is closely integrated with the Natural Capital Coalition’s “Natural Capital Protocol” for companies.

For someone who has worked on these issues for over 40 years, I feel we are witnessing a quiet tipping point within the financial sector, as the extent to which their future is underpinned by a healthy ecosystem, is gradually becoming recognised. Like exploring any new wilderness, it is comforting to at last have a reliable guide, to help plan the way ahead.

Andrew Mitchell is Co-Founder of the Natural Capital Finance Alliance.

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