The Natural Capital Finance Alliance (NCFA previously NCD – Natural Capital Declaration) is a finance sector initiative, endorsed at CEO-level, to integrate natural capital considerations into loans, equity, fixed income and insurance products, as well as in accounting, disclosure and reporting frameworks.
The NCFA is an initiative that goes beyond ‘sustainability’. It is about the materiality of natural capital to the health of financial institutions.
To achieve this, signatory financial institutions are working alongside supporter organisations to develop metrics and tools to help financial institutions to take natural capital considerations into account in future investment and lending decisions.
How is Natural Capital relevant to the Finance Sector?
As increasing global pressures chip away at stocks of natural capital, businesses face growing challenges. These can come in the form of legal liability, credit risk, volatility, unexpected falls in cash flows, and reputational, regulatory and portfolio risks, each presenting different financial pressures requiring additional mitigating measures. For example, the EU Environmental Liability Directive (ELD) makes companies directly liable for impacts on water resources, fauna, flora and natural habitats. Operators of risky or potentially damaging activities can therefore be held liable for the preventative and remedial costs of environmental damage. In these cases an investor may be left exposed to any litigious action against the operating company which could adversely affect returns.
At the same time, for industries dependent on natural capital, continued erosion of the global resource base presents additional operational challenges. Surging demand in the past decade alone has reversed a 100 year decline in resource prices. Increased demands on agricultural production, as well as associated water and energy requirements from feeding an additional billion people by 2030, will put upward pressure on the price of global soft commodities. These predicted increases will fall well within the investment horizon of pension funds and many loans, and represent supply chain challenges for many downstream businesses. A 2011 report by McKinsey found that 29% of profit warnings from companies in the FTSE were due to increases in the cost of raw materials. For large financial institutions, the exact level of exposure to this financial risk linked to natural capital is often not fully understood. This was highlighted in a recent EY study, which revealed that environmental externalities can equate up to 50% of company earnings in a standard equity portfolio.
Source and more info : http://www.naturalcapitaldeclaration.org/