dr richard mattison, ceo trucost plc quantifying the natural capital risk exposure of financial...
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Dr Richard Mattison, CEOTrucost Plc
QUANTIFYING THE NATURAL CAPITAL RISK EXPOSURE OF FINANCIAL INSTITUTIONS IN BRAZILPRESENTATION OF THE JOINT STUDY
DECEMBER 2014
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CONTENTS
• Introduction to Trucost• Importance of this study• What is natural capital and how to we account for it?• Why is this relevant for Brazilian financial institutions in particular?• What are the drivers for internalising environmental costs and why
is it a risk now?• Key findings of the report• Case study• Integrating natural capital analysis in equity analysis• Recommendations
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ABOUT TRUCOST
Trucost helps investors to understand the economic consequences of natural capital dependency in order to identify risk and
opportunity from growing natural resource pressures and environmental costs.
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IMPORTANCE OF THIS STUDYSome drivers take a long time to materialize and require government intervention but there are other mechanisms by which external costs can be rapidly internalised by economies, companies, investors.
This study is a first step to demonstrate how natural capital accounting can be used to analyse companies, portfolios and loans.
Investors and banks will need to apply the approach to their own investments in order to quantify the risks.
Risk teams need to anticipate these material issues, first quantifying risks to investments and then financing.
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What is natural capital and how do we account for it?
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NATURAL CAPITAL
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COSTS PER TONNE
NATURAL CAPITAL ACCOUNTING
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$2.2tnEnvironmental damage caused by world’s largest 3,000 companies
>50%Proportion of company earnings that could be
at risk from environmental costs
WHAT IS THE SCALE?
8
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VALUING NATURAL CAPITAL HELPS US TO:
• DETERMINE IMPACT MATERIALITY
• ASSESS ENVIRONMENTAL TRADE-OFFS
• UNDERSTAND REGIONAL RISK DIFFERENCES
• INTEGRATE THE RESULTS WITH BUSINESS METRICS
• COMMUNICATE THE RESULTS TO A GENERAL AUDIENCE
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TRENDS IN NATURAL CAPITAL ACCOUNTINGLEADERSHIP INITIATIVES
CORPORATIONS
SOVEREIGNINVESTORS
NGOs
MULTI-STAKEHOLDER GROUPS
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Why is this relevant for Brazilian financial institutions in particular?
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RELEVANCE FOR BRAZILIAN FINANCIAL INSTITUTIONS
Economic reliance on natural capital Agriculture accounted for 22% of Brazil’s GDP in 2012
Demand and supply side pressures Rapidly growing population
Strengthening legislation Potential compliance or litigation costs
Equity investments 28% of PF assets invested in equities - high exposure to companies facing natural capital costs
Corporate bonds Internalising costs could lead companies to default
Corporate lending Food and bev = largest sector for lending and highly dependent on natural capital
LACK OF A FRAMEWORK FOR TAKING ACCOUNT OF NATURAL CAPITAL RISK
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What are the drivers for internalising environmental costs and why is it a risk now?
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FACTORS THAT INTERNALISE AN EXTERNALITY
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WHY IS INTERNALISATION A RISK NOW?
• Changing demographic• Public awareness• Increasing regulation/voluntary commitments• Market dynamics• Stakeholder action• Climate risks• Resource depletion
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Key findings from the report
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KEY FINDINGS FROM THE REPORT• Unpriced natural capital costs of companies could be as much as R$1,646bn
• Banks are most exposed through financing of cattle ranching, fishing, food and beverages and agriculture
• Pension funds are most exposed through investments in food and beverage companies
• The natural capital risk exposure of financial institutions can vary significantly
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KEY FINDINGS FROM THE REPORT• The sectors cattle ranching, soya bean farming, crude
petroleum and natural gas extraction have the highest natural capital costs
• The highest natural capital intensity sectors (unpriced natural capital costs per R$m of production)
include cattle ranching, fats & oil refining, aquaculture, cotton farming, sugarcane farming and cement manufacturing
• The North of the country has the highest land use conversion cost because it is principally made up of Amazon rainforest
• There is a marked difference in the natural capital impacts of soy production in the two principal production zones
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CREDIT EXPOSURE OF TWO BANKS
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NATURAL CAPITAL RISK BY INDICATOR AND NCEX RATIO
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NATURAL CAPITAL COST - DIRECT AND SUPPLY CHAIN - AND NATURAL CAPITAL INTENSITY PER SECTOR (WITH AND WITHOUT CATTLE RANCHING)
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ENVIRONMENTAL IMPACT ANALYSIS BY SECTOR
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GHG AND WATER IMPACTS THROUGH THE SUPPLY CHAIN
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REGIONAL COMPARISON
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Case Study
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BEEF CATTLE RANCHING IN BRAZIL
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REGIONAL DIFFERENCES
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RISK MATRIX
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Integrating natural capital analysis in equity analysis
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INTEGRATING NATURAL CAPITAL IN FUNDAMENTAL EQUITY VALUATION
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Recommendations
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PROJECT DELIVERY
BUSINESS OPTIMISATION
VALUATION
OPPORTUNITIESRISK REDUCTION
Natural capital exposure
Climate volatility Policy risks Insurance costs Resource cost
volatility Client resilience Mega trends
REPUTATION
Stakeholder pressure Peer ranking Talent retention Branding and image
REVENUE GROWTH
New client services Low carbon business
opportunities Environmental trading Low carbon client
solutions ESG asset management Green retail banking
products Resource efficiency Partnership
opportunities
FINANCIAL INSTITUTION
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RECOMMENDATIONS
1.Quantify portfolio-level natural capital exposure
2.Identify drivers for cost internalization
3.Demand better data from companies
4. Consider the potential future natural capital risk that a company may face
5.Capitalise on changing market demand for more sustainable goods and services
6.Help customers transition to a more resource efficient and sustainable business model
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QUESTIONS