The Taskforce on Nature-Related Financial Disclosures (TNFD)'s beta version of its risk-management and disclosure framework marks an important step towards nature-related reporting. Sonia Shah explains what it means for firms.
The TNFD estimates that USD 44 trillion of economic value generation, more than half of global activity, is moderately or highly dependent on nature. The OECD says between USD 125-140 trillion of the value of services is provided by nature.
The TNFD aims to deliver a risk management and disclosure structure for organisations to report and act on evolving nature-related risks – nature-based reporting. The need for a shift in global financial flows toward nature-positive outcomes is clear. This beta version of the TNFD framework is a significant milestone in tackling nature and biodiversity loss.
The draft report includes three key elements:
outline of fundamental concepts and definitions
draft disclosure recommendations for nature-related risks and opportunities
how-to guide (LEAP) for corporates and financial institutions on nature-related risk and opportunity assessment
The TNFD has drawn on existing science-and consensus-based definitions to develop its fundamental concepts and definitions. The taskforce recommends that organisations use these when assessing, managing, and disclosing nature-related risks and opportunities.
Nature – land, ocean, freshwater, and atmosphere. These divisions provide the basic building blocks to understanding how society interacts with natural capital
Natural capital – natural resources that provide benefits to people
Environmental assets – naturally occurring living and non-living components of the Earth: for example, forests, wetlands, coral reefs and agricultural areas; it also includes ecosystems
Ecosystems - a network of plants, animals, and microorganisms that interact with each other and their non-living environment, which support the delivery of ecosystem services that benefit people and business
Biodiversity – a core component of nature that impacts the quality, resilience, and quantity of ecosystem assets and the provision of ecosystem services
Dependencies – ecosystem services that an organisation relies on for their business to operate, such as a clean and regular water supply
Impacts – positive and negative impacts that organisations have on environmental assets and ecosystem services
Nature-related risks – the potential threats posed to an organisation linked to its and other organisations’ dependencies on nature and nature impacts
Nature-related opportunities – activities that create positive outcomes for organisations and nature by avoiding or reducing the impact on nature and contribute to its restoration
What is the beta version of the TNFD's framework?
Stakeholders at all levels must pay attention to the TNFD’s beta framework as it provides the foundations for future work in this area. The first of stage of a consultation has begun and various stages of the beta version will be released in 2022 and 2023, with final recommendations in late 2023.
Draft disclosure recommendations
Alongside the clarifications on language, the TNFD has provided guidance explicitly built on that already recommended by the TCFD. They follow the TCFD’s four pillars of disclosure: governance, strategy, risk management, and metrics and targets.
The TNFD has also given guidance on how to approach nature-related risk and opportunity. The approach known as LEAP allows businesses to consider four core stages of analytic activity:
locate your interface with nature
evaluate your dependencies and impacts
assess your risks and opportunities
prepare to respond to nature-related risks and opportunities, and report to investors
The first prototype of the LEAP approach targets financial report preparers and users: eg, investors, creditors and insurers, as well as risk management and operations teams. This structure aims to support a wide range of corporates to take a detailed assessment of nature-related risks and opportunities through an understanding of their nature-related dependencies and nature impacts.
The TNFD noted that the scope and type of analysis is different for financial services, depending on the type of financial institution, asset class or product type, sector, geography, or investment theme, for example. The taskforce will develop and refine the LEAP approach for financial institutions in subsequent versions.
What can firms do now?
Businesses should engage with and pilot the beta version and assess their operations and capabilities in relation to the frameworks to identify gaps and support the TNFD’s development. This is how they can do it:
Consider domestic regulatory focus on nature-related reporting and understand how this impacts governance, strategy, risk management, and metrics and targets
Look to build on the TCFD work, as learnings can be applied across both frameworks (the TNFD will publish further resources clarifying the link between these standards)
Use the LEAP approach
The TNFD’s framework is the first step towards a global standard for nature-related reporting. Work on assessing the risk and opportunities around nature will only intensify – businesses should prepare sooner rather than later. This requires considerations around resource allocation and prioritisation.
Risk is an essential part of nature-related reporting, but there are also opportunities. Businesses can use this framework to push decision making towards more nature-positive outcomes and improve their ESG positions. While this framework is voluntary, it will drive domestic regulatory expectations and industry standards. Early movers stand to gain the most.