40 NCD
| UNEP FI
| GCP
include reconciling country and sub-national geographical information with corporate information. Connecting corporate dependence and impacts on natural capital to inancial
performance can provide a framework to evaluate how changes in natural systems translate into a changing resource base for business to identify potentially material issues
and sectors to focus on. The project will seek to put corporate resource use and impacts into the context of resource constraints and the state of the environment using information
from geographic information systems and remote sensing to evaluate exposure to spatially-explicit risk.
The NCD will explore the potential to harness statistical data on biodiversity and ecosystems, environmental economics and natural assets. Incorporating data from
national natural capital accounts where available could improve the eiciency of information to strengthen the functioning of capital markets and natural resource resilience.
4. Transferring technical advances on climate risk assessments to other areas of natural capital.
At a time when inancial institutions are starting to consider carbon risks embedded in portfolios, other natural capital factors are a logical next step to address
broader natural resource constraints and related inancial risk. GHG emissions are the irst natural capital indicator to be quantiied in investment portfolios see box.
54,55
Lessons learned from eforts to understand potential inancial risks from changing conditions
such as constraints on GHG emissions and exposure to climate change impacts can be transferred to natural capital indicators such as water use and deforestation impacts.
The Financial Stability Board, the G20-backed international body chaired by Bank of England Governor Mark Carney, recommended in November 2015 that the G20 support
the establishment of a climate disclosure task force.
56
The Bank of England has identiied three broad channels through which climate change can afect inancial stability:
57
◽ Physical risks: The impacts on liabilities and the value of inancial assets; ◽ Liability risks: The impacts that could arise if parties who sufer loss or damage seek
compensation from those they hold responsible. ◽ Transition risks: The inancial risks which could result from the process of adjustment
towards a more sustainable economy. The speed at which changes in policy, technology and physical risks could prompt
re-pricing of assets is uncertain and could determine impacts on inancial stability.
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The Bank also identiied an upward trend in indirect losses arising through second-order
events such as disruption of global supply chains. It notes that the insurance industry recognizes that the tail risks of today may signal the more volatile norms of the future if
business continues as usual. The NCD project will explore whether similar mechanisms can be modelled to understand
how changes in natural capital, such as a declining natural resource base and a degraded environment, can afect credit risk and asset values. The project will share knowledge
across ields such as insurancereinsurance and stress testing portfolios in the inancial system. For instance, testing the application of approaches in the insurance industry
to strengthen risk monitoring and management. Empirical studies may be undertaken to provide insights into links between natural capital risks and lending and investment
decisions.
54. http:www.unepi.orgileadmindocumentsUNEP_FI_Investor_Brieing_Portfolio_Carbon.pdf
55. http:www.ghgprotocol.org
56. http:www.inancialstabilityboard.orgwp-contentuploadsFSB-Chairs-letter-to-G20-Leaders-9-Nov.pdf
57. http:www.bankofengland.co.ukpublicationsPagesspeeches2015844.aspx
58. http:www.bankofengland.co.ukpublicationsPagesspeeches2015844.aspx
Towards Including Natural Resource Risks in Cost of Capital 41
5. Integrating approaches from a range of methodologies, models, tools and datasets:
