Natural capital credit risk assessment

In recent years, the financial sector has become increasingly aware of the implications of its impacts and dependencies on natural capital. Typically, these impacts and dependencies are indirect or direct exposures for the companies and other entities to which the financial sector provides services such as lending, investment and insurance. This implies a need for the financial sector to develop new methods and tools for conducting these activities. This chapter outlines recent developments in taking natural capital considerations into account in commercial bank lending, through the credit risk assessment process. It situates natural capital credit risk assessment (NCCRA) within the context of the earlier development of environmental credit risk assessment (ECRA) and provides a detailed review of how NCCRA can be conducted in practice. It demonstrates that NCCRA is feasible, using a combination of quantitative and qualitative inputs. Implementation challenges include the complexity and interconnectedness of natural capital processes, data availability and cost, spatial data analytical capacity and the need for transformational change, both within lending organisations and across the banking sector.