Demystifying the Taskforce on Nature-related Financial Disclosures (TNFD)

In response to the growing need to incorporate nature into financial decision-making, the Taskforce on Nature-related Financial Disclosures (TNFD) was established in 2021. The TNFD's mission is to emphasize the significance of nature and biodiversity within the realms of business and finance.

The TNFD draws inspiration from the Taskforce on Climate-related Financial Disclosures (TCFD) and other sustainability reporting standards, focusing on assessing an entity's impact on ecosystems and biodiversity. The framework is designed to facilitate the integration of nature-related issues into business strategies, risk management, and disclosures.

General requirements of the TNFD

There are six general requirements that are applied across all four pillars of the TNFD:

1. Approach to materiality – Entities should outline their approach to materiality, referencing any relevant regulations or standards. This will help readers understand the wider context of the disclosure and its significance.

2. Scope of disclosures – Entities should include details of the scope of the disclosure, including areas of the business and wider value chain. This includes referencing the specific elements of the framework they are addressing with the disclosure.

3. Consideration of nature-related issues – Entities should disclose any dependencies with, or impacts on, nature, including details of any risks or key opportunities.

4. Locations – Entities should disclose where interactions with nature occur. The geography could heighten or increase the risk profile.

5. Integration with other sustainability issues – Entities should state how they integrate the TNFD framework with broader sustainability and climate-related disclosures. This includes any key alignments or trade-offs.

6. Stakeholder agreement – Entities should think about how they are engaging with their stakeholders when putting together the report.

Understanding the Core Pillars of TNFD

1. Governance: TNFD underscores the importance of disclosing governance arrangements relevant to an entity's approach towards nature-related aspects. This includes comprehensive coverage of board oversight and management's role in the assessment and management of nature-related factors.

2. Strategy: Entities are encouraged to divulge the tangible impact of nature-related factors on their strategies, business models, and financial planning across various time horizons. This incorporates a forward-looking perspective, considering the implications of physical, transition, and legal aspects.

3. Risk and Impact Management: A critical facet of TNFD involves the disclosure of how entities identify, manage, and assess nature-related issues. This encompasses direct operations, the value chain, financed activities, and assets. Robust risk management practices, integration within the broader risk management framework, and stakeholder engagement are central components.

4. Metrics and Targets: TNFD emphasizes the importance of clearly articulating the nature-related metrics, targets, and goals that an entity utilizes to gauge material risks and opportunities, dependencies, and impacts. These metrics need to be science-based, practical, and aligned with global policy objectives.

The LEAP approach

TNFD outlines the LEAP approach, which is designed as an internal process to help entities understand and manage their interactions with nature. This approach is not mandatory, but can be a useful tool to help entities get started.

• Locate their interface with nature. Entities need to think about their business footprint, the biomes and ecosystems they interact with, the locations they impact, and the sectors or business units affected.

• Evaluate dependencies and impacts. This includes identifying environmental assets and ecosystem services, finding any dependencies or impacts, and undertaking a dependency and impact analysis.

• Assess risks and opportunities for the business. Entities need to consider their existing mitigation controls and opportunity management processes, establish where they need to undertake further work, and consider material elements for inclusion in the TNFD disclosure.

• Prepare to respond to those risks and opportunities and report on them. This includes strategy and resource allocation, and disclosure actions, such as what to include in the disclosure and how and where to present those findings.

Why TNFD is Essential

With over half of the global GDP reliant on nature, incorporating nature-related risks and opportunities into strategic planning and decision-making is paramount. The TNFD framework, although presently voluntary, is expected to follow a trajectory similar to the TCFD framework, potentially leading to regulatory adoption worldwide. The alignment between TNFD and TCFD recommendations, along with a growing regulatory focus on sustainability disclosures beyond climate, underscores the inevitability of nature-related disclosure requirements.

Nature and biodiversity-specific laws and policies are emerging at a steady pace. The UK's biodiversity net gain requirements under the Environment Act 2021 for new developments, the EU's Deforestation-free Products Regulation and the EU's 2030 Biodiversity Strategy all come to mind, as do international commitments made under the Kunming-Montreal Global Biodiversity Framework (GBF) and, in particular, Target 15 of the GBF – which says governments will take legal, administrative or policy measures to encourage and enable businesses to monitor, assess and disclose their dependencies, risks and impacts on biodiversity.

Governments and regulators now have an eye towards biodiversity risk, with over 190 states committing to a set of ambitious goals and targets under the Global Biodiversity Framework (GBF) in December 2022. Biodiversity loss is also now recognised by the world’s central banks, via the Network of Central Bank and Supervisors for Greening the Financial System (NGFS), as a source of systemic risk alongside climate change.

Tackling Challenges on the Path to Disclosure

A significant challenge lies in sourcing reliable and cost-effective data to inform decision-making, engagement, and governance. The TNFD framework highlights recommendations around metrics for assessment and disclosure. This includes, for example, metrics used to measure and manage nature-related risks and opportunities, and measure and manage dependencies and impacts on nature.

The framework is pragmatic and recognises that it will take time to source reliable, decision-useful data and expects that only over time, metrics should be provided against historical baselines.

Biodiversity risk presents a complex challenge, compounded by limited access to data presently. However, there's optimism regarding improved data availability as the broader market increasingly focuses on nature-related risks. Efforts by organizations like the International Sustainability Standards Board (ISSB) and The Partnership for Biodiversity Accounting Financials are pivotal in establishing global sustainability disclosure standards, fostering consistency in metrics.

Reference

1. Taskforce on Nature-related Financial Disclosures (TNFD) publishes its final framework

2. TNFD and the rise of nature disclosure regulation

3. Recommendations of the Taskforce on Nature-related Financial Disclosures

4. TNFD: The challenging and critical path ahead