ENCORE for Nature - a US$1.6tn opportunity
ENCORE launched in the Old Paris stock exchange - The Bourse. A new kind of capitalism emerges.
ENCORE - the world’s first comprehensive tool linking environmental change to its consequences for the economy, has been launched by the Natural Capital Finance Alliance (NCFA). It allows financial institutions to become more proactive about their opportunities and risks related to nature. Analysis using NCFA’s tool reveals that FTSE100 firms could collectively protect $1.6tn of market capital if they can understand their dependencies on natural capital better and factor this into their decision-making.
So how are FIs linked to nature? Sometimes the answer is obvious. Banks, seeing farmers without rain, may calculate how many will fail to payback loans. Trade finance spotting drying rivers can reprice Brazilian soy feedstock, unable to be transported to global markets. Insurers can price real estate loss from floods and tsunamis. Catastrophe risk is now quite well known, and quantifiable. What's missing is a much deeper understanding of what financial impacts will happen and where, when the systemic ecosystem services that financial institutions are linked to, through their lending or Investment portfolios, become erratic, unpredictable or gradually vanish all together.
At present I find among many major FIs, at best a lack of understanding and at worst complacency, about the scale of the natural capital impacts they are connected to. In part this is because, until now, there has been no easy method of making the 'eco' in Economy, visible to FIs. You won't find much data about natural capital inside a Bloomberg terminal. The new tool, ENCORE enables FIs to Explore Natural Capital Opportunities Risks and Exposure. It fosters collaborative work across internal teams. It means that no Head of Risk can in the future say, “I didn't know”.
Bruno Le Maire, French Finance Minister Brian Caplan, Editor of The Banker
Released this week at the UNEP Finance Initiative Global Round Table in Paris, ENCORE now makes it possible for a bank to screen its entire portfolio for global natural capital risk. Simply load up all the business sectors you lend to, and ENCORE will provide a red, amber, green ‘heatmap’ across 167 business sectors and their dependency on 21 ecosystem services from nature. Interactive maps are available showing where in the world these risks are. This essentially provides a qualitative measure of the ‘E’ in ESG. It also helps FIs to gauge their orientation to the UN Sustainable Development Goals, a key framing for the Responsible Banking Principles, also launched in Paris this week.
How does ENCORE work and how accurate is it? The tool has been three years in the making through a collaboration led by the Natural Capital Finance Alliance. It draws on global environmental datasets and was designed by experts at UNEP FI in Geneva, the World Conservation Monitoring Centre in Cambridge and Global Canopy in Oxford. Member FIs in the NCFA have provided advice and banks have tested the methodology in Peru, Colombia and South Africa. ENCORE cannot yet deliver quantification or company level data, but future versions plan to do this.
ENCORE analysis of the FTSE 100 identifies three sectors; agriculture, forest products, fisheries and aquaculture, that are the most exposed to economic disruption as depletion of nature accelerates. Considering these sectors employ more than a billion people around the world, this should be cause for concern. The entire global steel, IT, and automotive industries employ just 30 million.
Two recent hard hitting reports make the availability of ENCORE very timely. The IPCC report makes clear that we have 10 years left to turn around climate emissions. WWF’s report predicts a 60% loss of global biodiversity by 2021. Humanity has little chance of avoiding significant alterations to rainfall distribution, ice melt, and storm severity. California is emblematic of fires increasing globally. Whilst the loss of the last remaining northern white rhino in Kenya this year, might not impact a pension fund’s portfolio, the inability of gold mines to access water, industrial plants flooding along coasts, or vanished populations of bees rendering land unable to feed us, certainly will.
From a strategic point of view, whether finance supports or frustrates, the world's Sustainable Development Goals will increasingly become a lens through which financial regulators will view success. Millennials will also increasingly question an FIs licence to operate, if it facilitates business to destroy nature or our atmosphere. ENCORE can help FIs and family offices get ready now, for the changes to come and to accelerate their path towards sustainable, responsible lending and investment.