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Nature-Related Disclosures to be Rooted in Familiar Soil

Introducing new nature-related disclosure regime that complements TCFD will be challenging, experts say.

Asset owners are benefiting from greater visibility of climate-related risks, due to the widespread adoption of the Task Force on Climate-related Financial Disclosures (TCFD) guidelines. As concerns rise about risks to investments stemming from biodiversity collapse, nature-related risks are not so far behind.

Due to be launched in the second half of 2021, the Task Force on Nature-related Financial Disclosures (TNFD) is in the process of building a financial reporting framework for all nature-related risks.

“If we’re able to get companies to report in a unified manner against globally accepted standards on their nature-related impacts and dependencies, then we would be better able to capture the biodiversity impacts of our portfolios and be better able to communicate them to our clients,” says Peter van der Werf, Team Lead of Engagement and Active Ownership at Robeco, a member of the TNFD’s Informal Working Group (IWG).

The IWG consists of 73 members from across five continents, ranging from financial institutions and corporates, governments and regulators, as well as think-tanks and consortia. The working group will appoint and launch the official Taskforce which will then implement the work plan over the next two years. The reporting framework is anticipated to be published by 2023.

Backed by Global Canopy, the United Nations Development Programme (UNDP), the United Nations Environment Programme Finance Initiative (UNEP FI) and the Worldwide Fund for Nature (WWF), TNFD guidelines “will help financial institutions shift finance from destructive activities and toward nature-based solutions”, according to United Nations Secretary-General António Guterres.

Building the TNFD framework is not without its challenges. As well as identifying the metrics required to measure nature-related risks, the TNFD will need to decide the parameters of its framework, the nature-related risks it will be targeting and the extent of alignment to the existing TCFD framework – if at all.

The first priority of the TNFD is to build awareness among investors, financiers and policymakers that nature-related risks need to be identified and accounted for as a matter of urgency, according to a report by Global Canopy and Vivid Economics.

“Even before a TNFD is established, financial institutions can act now to reduce risk exposure and position themselves to capitalise on nature-related financial opportunities,” Global Canopy said.

“Financial institutions can benefit from starting this transition now, with proactive institutions able to leverage nature-related financial opportunities by building capacity throughout their organisation to measure and account for emerging risks and engaging with investee and client companies.”

Nature versus climate

A key challenge for the IWG is distinguishing between what is a nature-related problem and what falls under climate.

“In many cases, biodiversity loss is driven by climate change, so there’s a lot of interdependency between the two,” van der Werf tells ESG Investor.

According to the recent ‘Making Peace with Nature’ report by UNEP, while two-thirds of warming caused by anthropogenic greenhouse gases is due to carbon dioxide, one quarter is a direct result of “activities related to the land – agriculture, pastoralism, forestry and especially changing natural land covers to human-dominated ones”.

Van der Werf describes climate and nature-related risks as a Venn diagram of issues, the overlap in which is making the TNFD framework all the more challenging to build. The framework needs to adequately account for nature-related risks, but also needs to acknowledge climate without encroaching on TCFD’s progress with climate reporting, he says.

“Climate and nature are two sides of the same coin,” agrees Dr Rhian-Mari Thomas OBE, Chief Executive of the Green Finance Institute and Co-Chair of the TNFD. “Yet, to date, the finance sector has focused mainly on climate. The ‘E’ of ESG has really been a ‘C’ – carbon, or climate – and ‘green’ has similarly concentrated primarily on climate.”

The domination of climate has meant that the financial industry is still largely at the stage of realising the scale of nature-related risk impacts, Chris Dodwell, Head of Policy and Advocacy at Impax Asset Management, and member of the TNFD IWG, adds. “We still haven’t fully articulated what our response should be as a society or within the financial sector. The scope of TNFD is broader than climate. It’s not just biodiversity – we’re also looking at water, soils, deforestation. A lot of work needs to be done.”

With the drastic loss of animal pollinators, which are critical to more than 75% of food crops, according to UNEP’s report, the annual global crop output value will skyrocket to between US$235 billion and US$577 billion. Up to 400 million tonnes of heavy metals, toxic sludge and industrial wastes are dumped in the world’s waters annually, due largely to a doubling of the global chemical industry’s production capacity between 2000 and 2017. Furthermore, the fraction of remaining near-natural land is projected to be just 10% by mid-century, with degraded land reaching over 20%.

Even more concerning, zoonotic diseases – such as has been seen with the ongoing Covid-19 pandemic – can be directly linked to environmental degradation (such as deforestation) and illegal wildlife trading, the TNFD has warned.

Like climate action until recently, one of the main barriers preventing nature-related risks being addressed urgently is that transformational change has been “thwarted by vested interests that benefit from preserving the status quo”, noted UNEP.

Nature-dependent sectors are “significant” contributors to the wealth of leading economies, UNEP explained. They account for US$2.7 trillion of China GDP, US$2.4 trillion of EU GDP and US$2.1 trillion of US GDP.

Dodwell points to the recently published Dasgupta review, which emphasises that urgent and drastic action is required to preserve the natural world we have left.

“As the Dasgupta review made very clear, we need to adopt a new way of thinking,” he says. “Corporates and investors alike need to understand that we do have to be radical about this.”

“Nature loss has been so rapid and vast that we now face a planetary emergency,” Thomas agrees. “It’s time to ensure the restoration and protection of nature is built into financial decision-making.”

Aligning with the TCFD framework

With TCFD guidelines widely supported by global financial institutions and policymakers, it makes sense for the TNFD to use the existing framework as a jumping off point. How closely TNFD should align with TCFD has remained a point of “lively debate”, van der Werf admits.

Most notably, TCFD’s four-pillared approach to structuring climate-related disclosures – focusing on governance, strategy, risk management, and metrics and targets – is likely to be adopted by the TNFD, Thomas says. “There are clear operational advantages of aligning to a familiar framework, given the extensive reporting and disclosure demands on business and finance.”

As Dodwell points out, it’s likely that the same people within financial institutions will be reporting on nature-related risks, so ensuring compatibility is key.

“We want to align with TCFD wherever possible,” Dodwell says. “But we need to be very clear about how and why areas of the TNFD framework will diverge.”

The TCFD framework won’t be able to capture the full scope of nature-related issues, van der Werf argues. “It’s a question of which parts of that existing model are fit for purpose and which areas should be amended to allow for the more holistic perspective that the TNFD wants to implement,” he says.

Thomas acknowledges that the TNFD framework will need to further adopt the principle of double materiality, meaning that “an organisation should disclose not only how it depends on nature, but also how its activities and operations impact nature as well”.

At this stage, TNFD should be treated as a separate framework and a separate organisation, van der Werf adds. The key priorities are to ensure TNFD guidelines provide clarity to investors and reporting entities and allow for comparability of nature-related data.

Adopting nature-related targets  

Science-led data will be key to addressing the short-, medium- and long-term challenges of incorporating nature-related issues and disclosures into financial risk and portfolio management frameworks.

“It will be essential for scientific and finance communities to work closely together, ideally under the aegis of the TNFD, in order to ensure we have a set of relevant nature-focused metrics,” Dodwell says.

The role of science-led metrics has been increasingly recognised as accelerating climate action. Corporates adopting science-led targets for emissions reductions, such as those proposed by the Science-based Targets Initiative (SBTi), have benefited from reducing overall emissions by 25% since 2015.

Already 37 financial institutions are adopting science-based targets for biodiversity and have signed a pledge to report publicly on their exposure to biodiversity risks and further outline their targets to reduce their own impact on biodiversity by 2024 at the latest.

Nonetheless, climate targets benefit from the fact that they all fall under one overarching global goal: limiting emissions to a 1.5-degree scenario and a net-zero carbon emissions target. There is no equivalent umbrella goal for nature-related targets.

According to Andrew Mitchell, Founder and Senior Advisor to Global Canopy, there is a concerning lack of visibility of nature-related risks due to the absence of widely used metrics and data.

“The impacts of damaging nature do not show up in the share prices of the companies responsible for them,” he wrote in the Global Canopy and Vivid Economic report. “The effect is to overvalue companies that break down nature for short-term profit and undervalue those companies that invest in managing their natural capital for the long-term.”

Measuring nature-related risk

From an asset manager’s perspective, van der Werf argues that the TNFD framework needs to be “a fairly simple and easy to digest system”, which is easier said than done when considering the complexities of identifying, measuring and disclosing nature-related risks. From the wide range of ecosystems to the environmentally damaging practices within supply chains, identifying the best metric to measure a specific issue is daunting.

Nature-related data is also more dependent on location-specific attributes compared to measuring carbon emissions, van der Werf says. After all, one unit of carbon emitted in one country has just as much of an impact as one unit of carbon emitted elsewhere. “But one hectare of deforestation in Sweden has a very different impact than one hectare cut down in the Amazon,” he points out.

“One of the main conclusions we’ve drawn from IWG discussions is that we ultimately need to focus on the ‘hot spots’, both in terms of where we are most dependent on nature and which sectors are having the most impact on nature. It’s also important that we identify which ecosystems we need to prioritise protecting and restoring,” Dodwell says.

Context will play an important part in the TNFD framework, and therefore adopting a double materiality approach should increase the reliability of nature-related disclosures, van der Werf says.

“If the TNFD adopts too much of a holistic scope, there is a risk it becomes too much of an academic exercise and won’t be as efficient,” he warns. “Ultimately, corporates need to be able to report against it and investors need to be able to aggregate data at a portfolio level. It’s very important the TNFD framework has the end-users in mind.”

Dodwell adds that investors looking to assess and manage nature-related risks will likely need to adopt a “highly segmented approach based on sectoral, location and temporal specific analysis, on which the TNFD should aim provide guidance”.

The role of policymakers 

Policymakers also need to come together to help address nature-related risks, van der Werf notes, in order to help better align national strategies for dealing with global nature degradation. “I would like to see governments embrace the TNFD framework,” he says.

“So far, there’s a lack of policy direction for the economy to respond to,” Dodwell agrees. “We have the Paris Agreement for climate, but what do we have for nature?”

Policymakers do form part of the TNFD’s IWG, Thomas points out, including governments from France, the Netherlands, the UK, Switzerland and Peru. “Many different stakeholders, data providers, standards-setters and NGOs are feeding the IWG and Technical Expert Group (TEG) to help develop a scope for the TNFD,” she says.

The TEG is a group of individuals serving the TNFD in a personal capacity, including Clara Barby (Impact Management Project), Katia Karousakis (OECD) and Simon Zadek (Finance for Biodiversity). The TEG members all work for regulatory initiatives and nature-focused bodies that could adopt or mandate TNFD once launched.

Policymaker involvement from the outset may enable quick implementation of the TNFD framework as a legislative requirement – as has been seen in the UK with announcing that TCFD-aligned disclosures will be mandatory by 2025.

In May 2021, the delayed Convention on Biodiversity will take place in Kunming, China, and will be attended by representatives from the TNFD.

“The findings from the Convention on Biological Diversity (CBD) and potential policies that come from that are really important,” Dodwell says. “I’d like to see a framework that allows corporates and the finance sector to see the transitional pathways we need to handle nature-related risks and how that should be reflected in national policies.”

He notes that the CBD Secretariat – a neutral organisation staffed by international civil servants and held accountable to the COP – should present investors with a clear opportunity to engage with policymakers. Investors will be able to help shape a framework that is “more business friendly” and therefore more easily implemented into corporate strategy.

No time to waste

The investment industry, and the wider finance sector, shouldn’t be waiting for policymakers to “come along and solve all of this”, Dodwell warns.

Thomas agrees. Investors, stakeholders, asset managers and corporates should all be working to identify the physical and financial nature-related risks they are exposed to, with a view of addressing these issues ahead of TNFD’s official launch, she says.

If, and when, policy changes are introduced, they will also be faced with transitional risks, where financial institutions will “run the risk of being exposed to companies that will be penalised by incoming nature-positive regulation”, Thomas adds.

“While some of these risks are less imminent than others, it serves financial institutions to start familiarising themselves with these risks and assessing them now,” she says.

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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