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A Material Risk to Nature 

The consultation on the TNFD’s fourth and final framework shows the debate on materiality in sustainability reporting is not going away any time soon.  

Materiality has been a focus point in consultation responses to the Taskforce on Nature-related Financial Disclosures (TNFD) on its fourth and final beta framework (V0.4).  

While some respondents such as the UN-supported Principles for Responsible Investment (PRI) and the Institute of International Finance (IIF) support a flexible approach to materiality, as previously covered by ESG Investor, others say there is too much discretion in the TNFD’s current framework.  

In the current draft, the TNFD says it will provide adaptability regarding the approach to materiality to accommodate the preferences and regulatory requirements of report preparers and report users from organisations of all sizes and across all jurisdictions.  

But the Finance for Biodiversity Foundation in its response to the TNFD says there is too much discretion for companies to determine what is material and that all organisations should use a double materiality approach.  

The Finance for Biodiversity Foundation convenes financial sector signatories to a pledge to engage, assess impact, and set targets on biodiversity matters before 2025. It counts 140 financial institutions as signatories, representing €19.7 trillion, across 23 countries.  

Charlotte Apps, Sustainable Investing Associate at Fidelity International and a signatory to the Finance for Biodiversity Foundation, who leads the subgroup which responded to the TNFD, tells ESG Investor if executed correctly, and widely adopted by organisations, the framework has the potential to unlock a wealth of decision-useful information to enable reporting organisations, financial institutions, and other stakeholders to better understand impacts and dependencies on nature and in turn enable better risk management and opportunity identification.  

“The TNFD is the emerging nature-related risk management and reporting framework,” says Apps. “One of the barriers for financial institutions in addressing nature loss is a lack of decision-useful information on nature impacts and dependencies in disclosures from the companies that we invest in, in turn making it very challenging to identify nature-related risks and opportunities associated with the investment decisions we make and at the portfolio level. 

“Therefore, as financial institutions we have a keen interest in engaging in the consultative process to ensure the framework is designed to meet the needs of the finance sector, both as end-users of TNFD reports from investee companies, and for our own risk management and disclosures on nature.” 

Need for cross comparability  

As part of this, Apps says it is critical that organisations adopt a double-materiality approach, reporting on their impacts on nature as well as their risks from it. “Failing to do so does not address the systemic risks associated with nature’s decline,” she says. 

“Nature is still a relatively new topic for most organisations, therefore the TNFD needs to deliver is a pragmatic solution to nature-based risk management and reporting, to enable broad-based adoption by organisations. Too much discretion to determine what is material to an organisation could hinder cross comparability in disclosures from organisations operating in the same sectors or across supply chains.” 

This includes the TNFD aligning with the “emerging patchwork of global and local regulatory and reporting frameworks, such as Europe’s Corporate Sustainability Reporting Directive (CSRD) which requires a double materiality approach.  

CSRD, of which the technical advisor on its implementation is the European Financial Reporting Advisory Group (EFRAG), is one of three new big sustainability proposals coming into effect, alongside the first standards of the International Sustainability Standards Board (ISSB) and the US Securities and Exchange Commission’s (SEC) expected new rules on climate reporting.  

One key discussion with these different frameworks, is the necessity of inoperability, especially on materiality, which determines what gets reported.  

But, there is a current divide with both the SEC and the ISSB both focusing on financial materiality or ‘enterprise value’, while EFRAG’s standards for CSRD are adopting a double materiality approach – financial materiality and impact materiality – reflecting the effect the company has on people and the environment.  

Engaging with stakeholders

Carol Adams, Chair of the Global Sustainability Standards Board, responsible for the standards of the Global Reporting Initiative (GRI), is a well-known proponent of double materiality. She tells ESG Investor. “The GRI Standards Board believes that you need to know about your material impacts on stakeholders in order to fully identify your risks and opportunities from a financial perspective.” 

She says an organisation should start off the materiality process by understanding its the context, including the sustainability context.  

“And then from there, we’re going to look at the actual and potential impacts of the organisation by engaging with stakeholders, getting input from NGOs, academics, lawyers, and other  stakeholders, as well. And then assessing the significance of those impacts.” 

Apps agrees, saying the TNFD framework should also include that organisations need to be transparent about who was involved in the materiality determination process, including consultations they held with internal and external stakeholders.  

“Organisations need to demonstrate that stakeholders with appropriate expertise have been involved in the materiality determination process,” says Apps. “Given the nascency of the issue, organisations must demonstrate that they have the appropriate expertise to understand how the business interacts with nature. In addition, external stakeholders are key. Social considerations must play a leading role in the materiality determination process, identifying and consulting with key impacted stakeholders, notably local communities and indigenous people.” 

Reporting on adverse impacts  

The Organisation for Economic Co-operation and Development (OECD) Secretariat, in its response also challenges the TNFD’s approach to materiality. The letter, representing the view of the OECD Secretariat, not all its member countries, does say that given differing country contexts, flexibility will ensure the final framework could be interoperable with both single and double materiality.   

But it also says that TNFD’s approach to materiality means organisations choosing to report only on financial materiality will not be encouraged to report on the adverse impacts under the TNFD-recommended disclosures that are not material. It says:  “Recognising that country contexts differ, the TNFD may want to clarify the potential relevance of reporting on the adverse impacts of an organisation on people and the planet, as they may be material for the organisation’s long-term sustainability and resilience, in particular for organisations choosing to report on both financial and environmental materiality. Given the differing country contexts, such flexibility will ensure that the final framework could be interoperable with both single and double materiality.”  

Geraldine Ang, Team Leader at the OECD, says its Secretariat thinks there does need to be some flexibility as country circumstances differ, but it strongly recommends that the TNFD clarifies the relevance of reporting on adverse impacts on financial materiality in the long term. 

The OECD Secretariat is glad that the TNFD has gone further than the Task Force on Climate-related Financial Disclosures (TCFD) and included impacts in its scope.

Ang says: “They could be material for the organisation’s long term sustainability, financial stability and resilience.

“So we really want to stress that even for an organisation that was to report on the financial materiality, it could be relevant to flag in TNFD framework that those adverse impacts can still become material.

“The changes to the TNFD should clarify the importance of adverse impacts, regardless of the materiality approach, while recognising country circumstances differ.”

Relevant across jurisdictions  

Tony Goldner, Executive Director at the TNFD, tells ESG Investor that a lot of people have argued for double materiality, as well as a lot of people arguing for a financial or single materiality perspective. “I guess our starting point as a global initiative is that there is no globally-agreed definition of materiality. There are multiple different interpretations. There’s also the notion of dynamic materiality.” 

Goldner says a global initiative has two options – choose one over another or enable an organisation to use the materiality approach that works for them in their jurisdiction.  

“We’ve chosen to do the latter,” he says. “We see the TNFD as a tool, we are not writing a standard. The standards are being written by the ISSB and GRI, and governments writing their own regulatory standards as we’ve seen in Europe with CSRD.” 

Because it wants the recommendations to be relevant across different jurisdictions and across different markets, Goldner says the TNFD has attempted to develop materiality so it works in different contexts.  “If we pick one over the other, then we will limit the relevance of the attractiveness of the TNFD recommendations. We think that nature risk needs to be considered by everyone around the world.” 

On its recommendation on impacts, Goldner says it strongly encourages all organisations to report their impacts on nature, and its definition of impacts includes negative impacts and positive impacts.  

“We very clearly point to the need to assess negative impacts. We very clearly call for material adverse impacts to be disclosed. So, I think from our perspective, we feel like it’s in the framework.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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