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Niki Mardas of the Natural Capital Finance Alliance explains how the web-based Encore platform will allow financial institutions to assess how their portfolios could be affected by biodiversity loss
This year’s extreme weather, from heatwaves to hurricanes, has caused billions of dollars in losses for businesses, banks and insurers – and has provided a powerful reminder of our economic vulnerability to environmental degradation. Yet until now there has been no way to systematically assess and manage such risks.
That changed last week, with the landmark launch of the Natural Capital Finance Alliance’s Encore tool, which stands for “exploring natural capital opportunities, risks and exposure”. Encore is a web-based platform, three years in the making, that allows financial analysts to visualise the dependencies of each sector of the economy on natural assets, region by region around the world.
Encore has highlighted the sectors most exposed to natural capital risks: agriculture, aquaculture and forest products
To create this tool, the NCFA worked with the UN Environment World Conservation Monitoring Centre to map all 167 sectors of the economy to the 21 ecosystem services on which they rely – such as water, raw materials, healthy soils and pollination. It then analysed how these services could be disrupted by growing threats like climate change and biodiversity loss, with material impacts for businesses and investors alike.
Financial institutions can now use Encore to explore how specific industries depend on nature and assess how their portfolios could be affected. In the future, its comprehensive natural capital database could be tailored towards companies aiming to understand their own risks, as well as governments looking to increase economic resilience by investing in the protection and restoration of vital ecosystems.
Encore has already highlighted the sectors most exposed to natural capital risks, namely agriculture, aquaculture and fisheries, and forest products. It also shows how production processes across sectors rely directly on nature. For example, the mining industry’s reliance on groundwater provision or the oil and gas sector’s dependence on bio-remediation, nature’s armies of microbes that clean up contaminated soil and groundwater.
A showcase assessment of the FTSE 100, using information in Encore, highlights the scale of this economic threat. Encore found that in 13 of the 18 sectors that make up the index, a total of $1.6trn in net market capitalisation is associated with production processes that have a high (or very high) material dependence on nature.
That assessment follows research backed by the Food and Agriculture Organization of the United Nations (FAO) in 2016, which found that up to $570bn worth of annual food production relies on direct contributions from natural pollinators. This is perhaps even more significant given Encore’s findings that agriculture is the sector most dependent on natural capital of all 167 sectors of the economy.
If business as usual continues, impacts on nature could lead to trillions of dollars in losses to businesses, banks, investors and insurers, and threaten the very stability of our economies. For the financial community it is time to address what the Bank of England’s Governor, Mark Carney, has called the “tragedy of the horizon”, overcoming short-termism to build resilience in the face of these longer-term systemic risks. With the launch of Encore, one more piece of the puzzle to meet this critical challenge is in place.
Niki Mardas is a member of the NCFA steering committee and executive director of Global Canopy
natural capital finance alliance natural capital green finance