Natural capital declaration and new risk assessment tool for investors

Investment in three soft commodities: Palm Oil; Beef; and Soy, can indirectly contribute to substantial deforestation, ecosystem degradation and biodiversity loss across the globe.

The United Nations Environment Program (UNEP) recently commissioned a study (1) to provide greater clarity on policies that banks and investors could adopt to reduce deforestation and forest degradation from the production and supply of soy, palm oil and beef. Key mechanisms highlighted include strengthening internal policies and procedures, engaging with clients, restricting credit for the most harmful practices and incorporating risks from natural capital degradation into financial analysis.

The study and the accompanying risk assessment tool were produced by the Natural Capital Declaration (NCD), a global finance-led and CEO-endorsed initiative, which seeks to accelerate the integration of natural capital considerations into financial products and services such as loans, bonds and equities. Anders Nordheim, UNEP Finance Initiative, and Helena Viñes Fiestas, Head of Sustainability Research, BNP Paribas Investors, and WWF, were among the speakers at yesterday’s launch of the assessment tool and report.

The report describes how financial institutions can drive deforestation and land conversion through their lending and investment practices. Banks, investors and other types of financial institutions can be exposed to risks from companies in soft commodity production value chains by providing financial capital to activities that contribute to deforestation and damage to natural ecosystems. Few if any systematically quantify exposure to risks at the portfolio level. Challenges in doing so include access to information, limited resources, and the complexity of calculating and defining risk levels.

The new Soft Commodity Forest-risk Assessment Tool provides a framework through which financial institutions can assess and manage exposure.  It is a useful tool, which currently focuses on investment policies and procedures in terms of scope, strength, implementation, monitoring and reporting.

Future NCD work will aim to integrate risks from degradation of natural capital into credit assessments, cash-flow analysis and other financial metrics used for everyday decision-making in the financial sector. 

Notes

1.     United Nations Environment Programme (2015). Bank and Investor Risk Policies on Soft Commodities – A framework to evaluate deforestation and forest degradation risk in the agricultural value chain.

2.     Natural Capital Declaration (NCD) www.naturalcapitaldeclaration.org