TNFD: Bringing Nature Issues into Sustainable Financial Disclosures

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  • TNFD: Bringing Nature Issues into Sustainable Financial Disclosures

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    The Taskforce on Nature-related Financial Disclosures (TNFD), a new global initiative aiming to give financial institutions and companies a complete picture of their environmental risks, officially launched on June 4, 2021. An Informal Working Group (IWG) began the preparation work in September 2020 with support and comments from an Informal Technical Expert Group (ITEG) and an Observer Group of 67 members. The IWG consisted of 73 organizations from the financial business community, development finance institutions, central banks, standards bodies, governments, the United Nations, and many leading environmental organizations. The TNFD is co-chaired by CEO of Refinitiv David Craig, as well as Elizabeth Maruma Mrema from the United Nations Convention on Biological Diversity. Finance ministers from the G7 have endorsed the launch, stating that they look forward to the TNFD’s recommendations.

    The TNFD has published two documents, namely a summary report entitled Nature in Scope, and a full technical scoping document and workplan entitled Proposed Technical Scope Recommendations for the TNFD. According to the summary report, the goal of the TNFD is to provide a framework for organizations to report and act on evolving nature-related risks, in order to support a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes. The taskforce expects to deliver its first reporting framework by 2023.

    Importance of Nature-Based Financial Disclosures

    With a wide array of existing ESG reporting frameworks, financial institutions and corporates may question the value of creating another set of disclosure standards. Yet, the establishment of the TNFD may fill a critical gap in financial risk analysis. Simon Zadek, CEO of Finance for Biodiversity and co-chair of the ITEG for the TNFD, made a case for nature-based financial disclosures. He remarked that common perceptions of climate transition alone might suggest that the second-generation bioenergy market would be worth USD500bn globally by 2050. However, once the earth’s natural thresholds for change are factored in, the peak of the bioenergy market might stand at only USD25bn, implying a drastic overestimation of market value. To avoid such financial risks, the financial sector requires a robust framework and easily digestible nature-related data to inform their investment decisions. The TNFD could potentially serve as an effective tool to build a comprehensive and accurate understanding of the nature-related impact and limitations on climate-positive investments.

    The welfare of nature is a material issue to the global economy, yet it has received insufficient attention in financial reporting. According to estimates by the World Economic Forum (WEF), more than half of the world’s economic output, estimated at USD44tr, is moderately or highly dependent on a healthy and stable nature. This means the degradation of nature poses significant risks to corporate and financial stability. As of now, the economic activities of humans have contributed to an 83% loss of wild mammals and 50% of all plants, as well as severely altered around 75% of ice-free land and 66% of marine environments, according to the WEF. A report by Finance for Biodiversity entitled the Climate-Nature Nexus pointed out that risks are severely underestimated for sectors that have relatively small climate risks but rely heavily on nature, such as pharmaceutical companies with reliance on genetic biodiversity. 

    On the other hand, there are vast investment opportunities in restorative practices for nature, such as regenerative and vertical farming, with their estimated flows to be USD57bn annually by 2030. A WEF report in July 2020 found that improving nature protection and restoration could generate up to USD10.1tr in annual business value and create 395 million jobs by 2030. The creation of the TNFD could bring these nature-related financial risks and opportunities to light and incorporate them into corporate and financial decision-making, regulation, and supervision. 

    A Comparison between TNFD and TCFD

    Nicky Chambers, co-chair of the ITEG for the TNFD, said that the TNFD was inspired by the success of the Taskforce on Climate-related Financial Disclosures (TCFD) and intends to be familiar to those already engaging with the TCFD. The TCFD was established in 2015 by the Financial Stability Board (FSB) and released its first framework in June 2017. It has since mobilized thousands of organizations into standardized reporting on climate-related physical and transitional risks, becoming one of the most widely followed climate initiatives. As of October 2020, nearly 60% of the world’s 100 largest public companies support the TCFD, report in line with the TCFD recommendations, or do both, according to the FSB. More than 1,500 organizations expressed support for the TCFD recommendations since their first release in 2017.

    There will be linkages and similarities between the two frameworks. For example, the TNFD framework is likely to use a similar structure to the TCFD and mandate disclosures on nature-related physical and transitional risks, as well as transitional opportunities. The TNFD framework will also adopt a four-pillar approach like the TCFD, with the pillars being: governance, strategy, risk management, as well as metrics and targets. Furthermore, the TNFD will discuss how organizations can use scenario analysis to estimate their risks and opportunities, similar to the TCFD. Overtime, it is expected that the two frameworks will be complementary to one another. The synergies of a joint climate-nature financial disclosure can accelerate transition towards not only a net-zero carbon future but also the restoration of nature.

    At the same time, the TCFD and TNFD have distinctly different focuses. The TCFD provides a framework for financial institutions and corporates to identify and report on climate-related risks, but only through a climate lens. Its framework excludes other nature-related risks, such as plastics in the oceanic food chain, loss of soil fertility, deterioration of biodiversity, and so on. As TCFD’s complement, the recommended scope for the TNFD framework includes living (biotic) nature, water, soil, and air, as well as mineral depletion as it relates to other aspects of nature. Specifically, the TNFD set a higher importance on the risks associated with living nature, water, soil, and air than mineral depletion. Another key difference of the TNFD from its climate-focused counterpart is its emphasis on ‘double materiality’. The TCFD currently focuses solely on the financial materiality of climate change on a company or financial institution. With TNFD’s double materiality, how nature impacts a company and its operations is jointly considered with how the operations of the company impact nature. 

    In addition, the TNFD will also help organizations consider opportunities in nature-based solutions (NbS). NbS are ways to adopt biodiversity and ecosystem services as part of the business’s adaptation strategy, such as sustainable forestry, agriculture, and fisheries. NbS as climate adaptation strategies usually cost less than hard engineering approaches. According to the Climate-Nature Nexus report, coastal wetland restoration can be up to five times cheaper than submerged breakwaters as shoreline protection.

    Challenges of Nature-Related Disclosures

    The TNFD framework is expected to be more complex than the TCFD. Unlike climate-related reporting which deals with relatively universal metrics like carbon and climate, nature-related reporting faces challenges such as geolocation and geospecificity. For example, a liter of water in an arid region has very different implications than in the tropics. In addition, the scope of nature-related topics covers much more diverse issues than climate-related reporting, such as fishery productivity, habitat preservation, biodiversity, soil fertility, and so on. Compared to metrics like greenhouse gas emissions, many of the nature-related issues lack defined metrics, such as biodiversity, making it difficult to apply them to inform decision-making. Similarly, what nature-based solutions should be selected to best capitalize on nature-related opportunities also remain elusive. Furthermore, climate and nature-related issues tend to interlink and overlap. While the TNFD needs to highlight the interdependency between climate and nature, the framework also needs to adequately account for nature-related risks without encroaching on TCFD’s progress with climate reporting.

    As the world looks forward to the release of the TNFD framework, the adoption of sustainability reporting and investment remains challenging for many companies and asset managers. Seneca ESG offers a solution with our SaaS platform to enable portfolio assessment and corporate reporting with diversified data sources and reporting standards. Our experienced team will provide professional services to help you adapt to current and future ESG frameworks, including commercial, global, and regulatory standards. Contact us at info@senecaesg.com to access customized solutions for you.

    References:

    https://www.f4b-initiative.net/post/welcome-to-the-tnfd

    https://www.f4b-initiative.net/post/the-climate-nature-nexus-implications-for-the-financial-sector

    https://www.reutersevents.com/sustainability/solve-biodiversity-and-climate-crises-we-have-stay-within-planetary-boundaries

    https://www.fsb.org/2020/10/2020-status-report-task-force-on-climate-related-financial-disclosures/

    https://www.environmental-finance.com/content/analysis/cautious-optimism-for-tnfd-despite-challenges.html

    https://a1be08a4-d8fb-4c22-9e4a-2b2f4cb7e41d.filesusr.com/ugd/643e85_276c8cfee51d4bca97c082bb64e8058a.pdf

    https://www.edie.net/library/Can-the-Taskforce-on-Nature-related-Financial-Disclosures-solve-the-global-ecological-crisis-/7061

    https://www.esginvestor.net/nature-related-financial-disclosures-to-be-rooted-in-familiar-soil/

    https://tnfd.info/wp-content/uploads/2021/06/TNFD-%E2%80%93-Technical-Scope-1.pdf

    https://tnfd.info/wp-content/uploads/2021/06/TNFD-Nature-in-Scope_Final.pdf

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