Is operationalising natural capital risk assessment practicable?

Abstract

<p>Financial institutions are indirectly exposed to risks associated with the impacts and dependencies on natural capital and ecosystem services of the companies that they invest in, lend to, and insure. This is particularly true for banks lending to agriculture: a sector with both significant impacts and critical dependencies on natural capital. Bank lending is a vital source of new finance for the sector, which is essential to achieve sustainable intensification targets. Yet current credit decision-making practice is still based on conventional financial and management indicators, lacking any systematic assessment of natural capital risks, especially those associated with dependencies. Operationalising natural capital risk assessment requires practicable indicators and data to evaluate the most material natural capital risks for a given sub-sector and geography, but it is unclear to what extent these are available. We assess the practicability of natural capital dependency risk indicators and data sources for a critical case study of Australian sheep production. We find that at least moderately practicable indicators and data sources are available to assess the 11 major dependency risks that are material for this industry. Challenges remain in determining risk thresholds for most indicators, and quantifying risk impacts on profitability.</p>