Counting the cost: ENCORE helps banks assess exposure to environmental degradation
When Madeleine Ronquest attended the Johannesburg launch of an innovative guide designed to help banks assess their exposure to environmental degradation, a quick look around the room proved it was no longer business as usual in the financial sector.
“When I started out there weren’t any environmental or sustainability people in the banks, and (at the launch) we were looking around and those groups have significantly grown to become teams of people,” said Ronquest, who is head of environmental and social risk, climate change at South Africa’s FirstRand Group.
Ronquest was attending the January unveiling of a step-by-step guide to enable financial institutions to carry out rapid natural capital risk assessments.
Natural capital -- the world’s stock of natural assets such as soils and water -- affects all economic activities, directly and indirectly. Businesses depend on it for direct inputs, such as water and materials, but also experience indirect effects as when environmental degradation, for example floods or erosion, affect production processes.
The guide was produced by the Natural Capital Finance Alliance (NCFA), a collaboration between the UN Environment Finance Initiative (UNEP FI) and Global Canopy, in partnership with PricewaterhouseCoopers.
The guide promotes the use of ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure), the first comprehensive web-based tool linking environmental change with its economic consequences, produced by the Natural Capital Finance Alliance in collaboration with UN Environment World Conservation Monitoring Centre.
ENCORE allows financial institutions to assess their exposure to events like deforestation, pollution of the oceans, droughts, changes in biodiversity and soil degradation. It can also be used to identify key opportunities for investment in the transition to a green economy.
“With the launch of ENCORE and the natural capital risk framework for banks, the finance sector has for the first time systematic and robust information on how nature and the economy connect,” said Anders Nordheim, programme leader—ecosystems and sustainable land use, UN Environment Finance Initiative.
The development of the ENCORE tool is part of the Advancing Environmental Risk Management project, run by the Natural Capital Finance Alliance, to help financial institutions integrate the risks they face because of environmental degradation.
FirstRand piloted the guide, and has also been using the ENCORE tool, which was launched last November. For Ronquest, the tool, which has a database covering 167 economic sectors and 21 ecosystem services, filled some of the data gaps around natural capital risk.
“It gives you a very nice overview … it assesses what risks you need to look at and what you need to take into account. What we are going to be doing is incorporating that into our risk- management framework so that it is aligned with how we rate our risks and prioritize them,” she said.
Starting with its agriculture portfolio, FirstRand will use ENCORE alongside data from expert institutes on geographical exposure to droughts and other extreme events.
“We will map the ENCORE tool over this database of specific geographical exposure and then base it on our existing environmental risk management framework. It will help us a lot with communication and awareness-raising,” she said, adding that the bank’s relationship managers would then be able to talk to clients about mitigating risk.
“This is where we are going to cross the line that we usually have as a financial institution in terms of playing a larger advisory role,” she said.
“We would rather see us working together with our clients and becoming more resilient in the sector, rather than just adjusting our risk appetite and funding. A large portion of (South Africa’s) gross domestic product and economy rely on agriculture and food security and it’s too important a sector for us to just walk away,” she said.
FirstRand is also working with non-governmental organizations and development banks to train young farmers.
“I’m excited about this programme and it is expanding. We have the opportunity here to build a nation of more sustainable farmers,” Ronquest said.
For UN Environment Finance Initiative’s Nordheim, the ENCORE tool is refashioning the way banks, investors and insurers approach environmental factors.
“This enables finance to better bring natural capital considerations into their decision-making, contributing to innovations that can accelerate the change to sustainable consumption and production,” he said.
Innovation across all sectors of global economies and societies will take centre-stage at the fourth UN Environment Assembly in March. The motto for that meeting is to think beyond prevailing patterns and live within sustainable limits.
Ronquest, who studied environmental management as well as risk management, says the time is now ripe for financial institutions to take environmental degradation seriously. This is already happening in South Africa, where the consequences are very evident, not least because of recent droughts.
“We are already seeing the impact on our portfolio: we are seeing farmers going out of business, and into business rescue, and we’re already seeing the devaluation of property that we’ve securitized over those loans,” she said.
Ronquest says FirstRand is fortunate to be part of the UN Environment Finance Initiative, which ensures environmental issues are front-and-centre for financial services. The message is getting through, particularly in her own bank, where she has worked for 18 years.
“I’m seeing the tipping point. Initially (my department) may have just been tolerated as a kind of ‘green issue’ … Over the last two years, things have changed rapidly … We have significantly changed the path of many decisions in the group regarding environmental impact.”
She recognizes that critics may be sceptical about banks professing to care about the environment but says this can be addressed by building trust with communities, and actively contributing to a reduction in environmental degradation.
“Whether the decision is to withhold finance or maybe give conditional finance, there are many ways we can exercise leverage in terms of what we finance and what we don’t,” she said.
“Climate change, natural capital risks, all of those are significant social issues and will lead to social impacts—food security, biodiversity, soil degradation, ecosystem impacts. They all have an impact on society ... It’s all integrated. Once we look at how it’s interconnected, there is a lot of scope for us to do more.”
The ENCORE project has been made possible with funding from the Swiss State Secretariat for Economic Affairs (SECO) and the MAVA Foundation.