Commentary

ICYMI, Natural Capital is Going Mainstream

TNFD framework marks major step toward investments that protect and support biodiversity. 

This week saw a significant milestone in efforts to bring responsible management of natural capital into the mainstream, intended to end the era in which humanity exploited the planet’s resources for free and at will.  

The release of its draft reporting framework by the Task Force on Nature-related Financial Disclosures (TNFD) sets in motion a rolling 18-month consultation process during which investors and corporates can provide feedback, while getting to grips with the concepts, metrics and data that will quantify their nature-related dependencies, risks and impacts. 

As highlighted by Jessica Smith, Nature Lead at UNEP FI, in this week’s ESG Interview, the TNFD’s approach consciously builds on and aligns with existing initiatives such as TCFD and Science Based Targets for Nature, to simplify and accelerate the allocation of capital to investments and activities that protect and support biodiversity.  

Russia’s invasion of Ukraine has already refocused attention on risks and dependencies in the global food system, with the potential for grain shortages to have knock-on impacts in already over-exploited regions, but also to serve as a catalyst for investment in innovation. Recent policy developments, such as the UN resolution on plastic pollution, Europe’s planned deforestation laws and the UK’s new long-term environmental targets will further shape investor priorities, alongside ongoing efforts to address known nature-related risks, such as ocean health and animal welfare. 

Putin’s war is also adding urgency to the transition away from fossil fuels. Having agreed a new energy strategy last week, Europe confirmed the Carbon Border Adjustment Mechanism, which will tax carbon-intensive imports. The UK’s business secretary has indicated its direction of travel ahead of a new strategy next week, as countries including India balance short-term realities with longer-term strategies to foster clean energy innovation.  

In addition, it is providing a new backdrop to engagements between investors, banks and corporates on decarbonisation and net zero transition. In a matter of days, we’ve seen HSBC commit to phasing down fossil fuel investments, UBS outline new 2050 milestones and Swiss Re excluding insurance for most new oil and gas projects. With oil majors including Shell, TotalEnergies and Occidental not moving at the same pace, many upcoming AGMs will be dominated by climate-related resolutions 

But boards can expect to be challenged by investors on human rights and workplace issues, too. Shareholder advisory consultancy PIRC this week flagged examples of ‘social washing’, focused on the use of opaque and unreliable data to suggest high rates of employee satisfaction. The risks of unfair treatment of workers were also highlighted by the redundancy tactics of P&O Ferries, although parent DP World is unlikely to face a shareholder backlash.   

New research this week reflected the frustration of asset owners with data gaps, but also suggested they are not taking all the steps they could to integrate ESG factors into their investment processes. Evidence of the non-alignment with climate goals of even Article 8 equity funds also indicates the need for further regulatory intervention to provide investors with supporting data.  

Likely delays to Europe’s Corporate Sustainability Reporting Directive will not help, but we may next week at last understand the scope of US mandatory climate reporting rules, now dubbed the Sunshine Act, presumably on the basis that sunlight is the best disinfectant.  

 

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