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Integrating Natural Capital in Risk Assessments: A Step by Step Guide for Banks

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Available in English and Spanish

The report, ‘Integrating Natural Capital in Risk Assessments’ is a step-by-step guide to help financial institutions conduct a rapid natural capital risk assessment.  The guide is produced by the Natural Capital Finance Alliance (NCFA) in collaboration with PwC, and represents the second phase of the Advancing Environmental Risk Management (AERM) project. The first report can be found here.

The guide has already been piloted by five banks, and complements the recently launched ENCORE tool (Exploring Natural Capital Opportunities, Risks and Exposure), which enables financial institutions to understand and assess their exposure to natural capital risks. The guide helps banks to better understand how environmental change such as ocean pollution or deforestation may affect their portfolios. The guide is published as part of the AERM project to help financial institutions understand and integrate the risks they face because of environmental degradation into their risk assessment methods and decision-making tools.

The report guides users through two processes:

  • Rapid Natural Capital Risk Assessment, which allows an institution to quickly identify the areas of highest natural capital risk.  
  • Sector/Asset Analysis, which uses location-specific environmental data to assess the likelihood and likely impact of disruption that businesses in their portfolios face due to environmental change. This could notably help financial institutions in their climate scenario analyses as recommended by the TCFD.

By combining a comprehensive knowledge base with environmental scenarios and location-specific asset data, financial institutions can assess and quantify their natural capital risk in qualitative and quantitative terms. This insight can be incorporated into existing risk processes, for example, by combining internal data on client location with environmental data to improve strategic scenario planning and credit risk management.