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TNFD for financial services: Using the LEAP

Sonia Shah Sonia Shah

The beta version of a nature-related risk-management and disclosure framework notes that the guide on risk and opportunity analysis must be tailored for financial services. Sonia Shah outlines what this means for financial services firms and what you can do now.

In the evolving ESG and sustainability landscape, there's a need for a framework that can effectively quantify the value of nature and embed it into economic frameworks – also known as nature-based reporting. 

The Taskforce on Nature-Related Financial Disclosures (TNFD) sprouted out of this need. This group aims to deliver a risk management and disclosure structure for organisations to report and act on evolving nature-related risks. This will encourage a shift in global financial flows toward nature-positive outcomes. The beta version of the TNFD’s framework marks a significant step in tackling nature and biodiversity loss. 

The draft report provides an outline of fundamental concepts and definitions, draft disclosure recommendations for nature-related risks and opportunities; and a how-to guide on nature-related risk and opportunity assessment: locate, evaluate, assess, prepare (LEAP).

However, the TNFD admitted that further work is necessary on tailoring the LEAP approach for financial services.

How can financial institutions use LEAP?

The LEAP approach 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, and prepare to respond to nature-related risks and opportunities.

The TNFD also provided four guiding questions that consider the type of financial institution, type of product or asset class, level of aggregation and sector in which the institution allocates capital. This seeks to support firms progressing to the ‘locate’ or ‘evaluate’ phase of the LEAP approach.

Firms must ask themselves the following:

1 What's the status of our business as a financial institution and how does that affect our interactions with nature?

2 Which asset classes/financial products do we have and what are their potential interactions with nature?

3 What level of assessment is feasible/appropriate for our business, given the level of aggregation of financial products and services?

4 What's our potential exposure to nature-related risks and the potential for nature-related opportunities, given the sectors and geographies in which we allocate capital?

The answers to these questions will guide how firms interact with the LEAP framework. At this point firms can examine the next level of guidance within the approach.

The TNFD provides the core questions that firms should consider in preparing for nature-related reporting. Allocating resources towards answering these will help them to identify potential gaps, as well as opportunities around natural capital.

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Locate:

1 Where are our direct assets and operations, and our related-value chain (upstream and downstream) activities?

2 Which biomes and ecosystems do these activities interface with? What's the current integrity and importance of the ecosystems at each location?

3 At which locations is our organisation interfacing with ecosystems assessed as being low integrity, high biodiversity importance and/or areas of water stress?

4 What sectors, business units, value chains, or asset classes are interfacing with nature in these priority locations?

Evaluate:

1 What are our business processes and activities at each priority location? What environmental assets and ecosystem services do we have a dependency or impact on at each priority location?

2 What are our nature-related dependencies and impacts across our business at each priority location?

3 What is the size and scale of our dependencies on nature in each priority location?

4 What is the size and scale of our nature impacts in each priority location?

Assess:

1 What are the corresponding risks for our organisation?

2 What existing risk mitigation and management approaches are we already applying?

3 What additional risk mitigation and management actions should we consider?

4 Which risks are material and should be disclosed in line with the TNFD disclosure recommendations?

5 What nature-related opportunities does this assessment identify for our business?

Prepare:

Strategy and resource allocation:

1 What strategy and resource allocation decisions should be made as a result of this analysis?

2 How will we set targets and define and measure progress?

Disclosure actions:

3 What will we disclose in line with the TNFD disclosure recommendations?

4 Where and how do we present our nature-related disclosures?

What can firms do now? 

Firms should engage with the beta version and assess their capabilities with relation to the frameworks to identify gaps. While some may have not considered nature-related reporting yet, it's important to use the TNFD’s work as the foundation for future compliance.

The TNFD’s framework is the first step towards a global standard for nature-related reporting. 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. 

You should explore the domestic regulatory focus on nature-related reporting and understand how this impacts governance, strategy, risk management and metrics and targets. Starting to map out the internal frameworks will push you in the right direction.

Firms can look to build on their response to TCFD. Consistency and harmonisation among different areas of ESG and sustainability is a key priority for all stakeholders, meaning you can leverage learnings across frameworks.

While risk is an essential part of nature-related reporting, there are also opportunities. Businesses can use this framework to push commercial decision-making towards more nature positive outcomes that improve their ESG positions.

Firms that start out early stand to gain the most, while those that fail to plan now may struggle to adapt in the future. 

If you want to discuss nature-related reporting, biodiversity or any topics mentioned in this piece, contact Sonia Shah.