In recent years, companies have worked on pioneering approaches to move sustainability closer to their core business and financial key metrics. In order to achieve this, environmental and social resources are translated into financial values using the "Natural capital" and "Social Capital" methodology.
Using the concept of Natural Capital, businesses can understand the benefits from and impact on nature in financial terms, the associated risks and opportunities and are able to make better informed decisions, for its own sustainable growth and its natural surroundings. We investigate this emerging risk topic, as Allianz Global Corporate and Specialty may be your partner to explore the impact and dependencies related to Natural Capital Risks in the future.
The concept of Natural Capital defines the global stock of natural resources, which include water, soil and air as well as all living organisms. Natural Capital assets supply businesses with a wide range of resources and services, while currently these essential natural components are often underpriced or not given valuation at all.
Natural Capital is an extension of the economic notion of capital (resources which enable value creation) to goods and services provided by nature. Natural capital provides services like water catchment, erosion control and crop pollination, which in turn ensure the long-term viability of other natural resources.
The Natural Capital Coalition is the main collaboration platform of relevant stakeholders working on the further development and harmonization of different approaches to Natural Capital. Companies used to regard Natural Capital as an element of the corporate social responsibility program. However, more and more companies are considering Natural Capital now as a fundamental condition for their financial success.
From 2016 onwards, the Natural Capital Protocol and additional toolkits have been released to give further methodological guidance for business on how to approach the valuation of Natural Capital.
For virtually all companies and sectors, the direct or indirect use of natural resources (e.g. clean water or pollination as an eco-service) is crucial for their value creation. Adverse availability and pricing of Natural Capital assets may therefore result in a business interruption.
A business interruption occurs in case the asset is
At the same time, a company might not be able to impact an asset as it is used to, or has to pay a higher price for this impact. At the same time, third parties can potentially claim damage to assets they use (such as water sources). Therefore liability may arise in case the asset is:
Generally, business would need to consider impact and dependencies associated with the following five aspects of Natural Capital assets
The following impact and dependencies related to Natural Capital Risks appeared to be material. Related to Biodiversity:
Risks related to the Natural Capital assets generally materialize through one or a combination of the following factors:
Once a risk materializes, companies can suffer from material and immaterial damage such as liability costs, increased production costs, lost profit and business interruption - and worst case a total loss of the business at hand. The damage from these risks can be very significant and vary over different time horizons.
Recently, AGCS has conducted a sector research to get a better understanding of specific risks in twelve relatively exposed sectors when it comes to Natural Capital Risks. The following sectors are in scope:
Automotive / Apparel / Chemicals / Construction materials
Food & Beverage / Manufacturing / Mining / Oil & Gas
Pharmaceuticals / Telecommunications / Transport / Utilities
For more details on the topic, please refer to the AGCS publication:
In early 2018, AGCS will release detailed research, trusting it will be a supporting document for companies to develop a better understanding of Natural Capital Risks. In 2017, AGCS has contributed a number of activities in this realm: Allianz contributed to a White paper on the practical application of Natural Capital valuation (‘Operationalizing Impact Valuation’) and the related ‘Embankment Project’.
AGCS strives to support our clients’ management of the Natural Capital Risks and is open to approach innovative risk solutions where they do not yet exist.We are dedicated to deliver the best solutions to the management, control and reduction of ESG risks.
If you are interested to learn more, do not hesitate to get in touch: AGCSSustainability@allianz.com