Fund Solutions

Nature, Climate Integration Key to Net Zero Transition – F4B

New framework for investors designed to complement TNFD.

New guidance from the Finance for Biodiversity (F4B) initiative encourages institutional investors to give equal weight to climate and nature-related factors in their portfolio assessments and reporting.

F4B launched its net zero transition framework to help asset owners and other financial institutions adopt a fully integrated approach to climate and nature risks and impacts.

The framework builds on existing climate reporting guidelines, like the Task Force on Climate-related Financial Disclosure (TCFD), to demonstrate how nature-based factors can be incorporated. It covers five components: concepts and language, transmission channels from risk to value, approach to uncertainty, climate-nature interaction efforts, and aggregation. Integration will reduce “mispricing risks and opportunities” and help to drive financial performance, F4B said.

“The climate and nature systems are deeply interconnected. One cannot accurately assess climate-related risks without considering nature. Equally, one cannot accurately assess nature-related risks without considering climate,” the report added.

A number of nature-related issues caused by climate change – such as desertification and ocean acidification – were recently highlighted in the latest report by the Intergovernmental Panel on Climate Change (IPCC).

“We know investors are going to want assessment and reporting solutions at the climate-nature nexus in the future,” Simon Zadek, F4B Chair, told ESG Investor. “We didn’t want to sit on our hands, but are instead looking to get that discussion started now.”

Corporate use of voluntary carbon markets (VCMs) to offset carbon emissions is an example of the need to measure climate and nature-related risks in tandem, said Zadek.

“The quality and effectiveness of purchased carbon credits depends on the credibility and sustainability of the nature-related projects producing those credits,” he noted.

The F4B framework has been designed for financial institutions, but it can also be adopted by corporates looking to disclose a broader range of environmental risks and impacts.

Zadek said updates and amendments will be made to the framework according to users’ experience and feedback.

The new framework follows a 2021 F4B report which outlined how climate-nature interactions will determine the attractiveness of prospective investments in the future.

The F4B initiative was established in October 2019 to increase the materiality of biodiversity in financial decision-making and better align global finance with nature conservation and restoration.

Complementary to TNFD

The F4B framework has been developed to complement the Task Force on Nature-related Financial Disclosure’s (TNFD) upcoming guidance, Zadek said. TNFD’s draft framework is expected to be published next week.

“The F4B framework is intended as a contribution to TNFD’s next phase of work, which will look at scenarios and transition pathways, as well as the links between nature and climate,” Zadek noted.

Mirroring the TCFD’s four pillars for reporting and aligning with the United Nations Convention on Biodiversity’s (CBD) draft Global Biodiversity Framework (GBF), it is expected that TNFD recommendations will be incorporated into the disclosure standards of existing sustainability standards bodies and written into national law by governments.

More than 1,000 companies globally, with revenues of US$4.7 trillion, have called on governments to adopt policies to reverse nature loss.

In a separate statement, ten of the world’s largest accountancy institutes recently committed to six key actions, including understanding how their organisations and clients impact and rely on nature, and providing sound advice and services that have a positive effect on nature.

Alongside co-constructing the EU sustainability reporting standards (ESRSs), the European Financial Reporting Advisory Group (EFRAG) and sustainable disclosure body the Global Reporting Initiative (GRI) are further collaborating on the development of biodiversity standards. EFRAG is expected to submit a draft to the European Commission (EC) by June.

The United Nations Environment Programme Finance Initiative (UNEP FI) has also recently launched a science-based toolkit to help banks, insurers and investors align their decision-making with supporting ocean health. It addresses issues concerning solid waste pollution and coastal infrastructure projects.

“Biodiversity is increasingly on the agendas of financial institutions, not only for its contribution to climate change mitigation and adaption, but because it underpins all economic activities and human wellbeing,” said Jan Erik Saugestad, CEO at Storebrand Asset Management.

“There is an urgent need to approach the transition to both a net-zero and nature positive world in an integrated way. Failure to do this will mean the financial sector mispricing risks and opportunities, and incorrectly valuing assets.”

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