No Place to Hide

Tony Goldner, Executive Director of the Taskforce on Nature-related Financial Disclosures, says addressing nature risks effectively requires a change of mindset.

“At a time when plants and fungi are increasingly under threat, we need to act fast to fill knowledge gaps and identify priorities for conservation.”

This was the conclusion drawn by Professor Alexandre Antonelli, Director of Science at Royal Botanical Gardens Kew, on the publication this week of its fifth ‘State of the World’s Plant and Fungi’ report, which offered further evidence of the extent of biodiversity loss.

Among its headline findings were that three in four undescribed vascular plants are likely to be already threatened with extinction, and that 45% of all known flowering plant species could be under similar threat. The report also identified 32 ‘biodiversity darkspots’, where both geographic and taxonomic data are lacking, leaving scientists “in the dark” about their biodiversity.

Filling in knowledge gaps and identifying priorities for conservation could almost describe the key objectives of the Taskforce on Nature-related Financial Disclosures (TNFD), the organisation that has spent much of the past two years coming up with the tools and methodologies needed by companies and investors to develop a sustainable relationship with nature.

Its efforts reached a major milestone last month with the publication of its final recommendations for disclosures on nature-related risks, impacts and dependences, published alongside still-evolving guidance.

With a large number of pilot projects having been coordinated by the TNFD, the scope and shape of the challenge is now dawning on many. Typically, nature-related impacts and dependencies are complex, varied and location-specific requiring several steps before value at risk can be calculated.

For universal owners, there is “no place to hide” from nature-related risks, says TNFD Executive Director Tony Goldner. Diversification or divestment are not realistic options. Responding to the risk effectively, he asserts, requires a new relationship with, or understanding of, nature.

“The biggest shift that we would like to see is a shift from thinking about nature as this endless provider of free resources into our economies and our societies to a source of significant risk to business and finance,” he says. “It is not just a corporate social responsibility issue.

“If we accept that nature is a source of risk, like cyber risk or political risk, then businesses will have to take responsibility to manage that risk in the best interest of all stakeholders, because it sits within the existing responsibility and fiduciary duty of executives and boards today.”

Beyond the boardroom

Arguably, a mindset shift is needed beyond the boardroom too. As leaders of the Group of 20 met in India in early September, environmental disclosure platform CDP chastised the world’s largest economies for failing to take meaningful action on mandating nature-related disclosures, in line with Target 15 of the Global Biodiversity Framework. Only Brazil, the EU, Singapore and Indonesia have implemented or are working on implementing any biodiversity-related disclosure requirements, it found.

Goldner is sanguine about the lack of progress by governments in the 10 months since COP15. He points to the funding provided by governments to support the development of its disclosure standards, which implies a strong desire for a market-led solution which can in due course be adopted by regulators.

He also notes the TNFD’s remit to drive voluntary adoption, as well as its extensive efforts to make its framework as user-friendly and widely applicable as possible, which include alignment with existing standards. These attributes should make it easy for both standards-setters and national regulators to incorporate the TNFD’s work into their own rules and guidelines.

“We now provide a very practical set of recommendations and guidance to get market participants moving,” he says. “It should be no surprise that both policymakers and regulators have taken an interest in what we’re doing. But ultimately, it’s up to them to decide when they want to consider incorporating our recommendations into mandatory regulations.”

Goldner also cites close collaboration with standards-setters in key jurisdictions such as the European Financial Reporting Advisory Group, as it developed the European Sustainability Reporting standards which underpin Europe’s Corporate Sustainability Reporting Directive, which comes into force next year.

He accepts that it’s still going to take “some time” for reporting standards to be developed, but highlights that the International Sustainability Standards Board has indicated that nature could be a focus, as its climate and general sustainability disclosure standards start the process of being adopted domestically.

“The priority for everyone right now, including with the encouragement of governments, should be to encourage market participants to take on board the TNFD recommendations on a voluntary basis, while additional work at the standards level is being undertaken,” he says.

“The worst-case scenario is that companies sit on their hands and do nothing in relation to nature-related risk because the risk is sitting on their balance sheets and even their cash flows and in their investment portfolios today. It’s in their own interest to start using the tools that the TNFD has developed to get a handle on their nature related issues and start managing them like they do with any other risks.”

Into the light

Take up of the TNFD’s work has already been extensive by corporates and financial institutions. Treating the development of its recommendations and guidance like a series of software updates has driven momentum. At least 240 organisations have started using them, sometimes collaboratively, in pilot projects even before the V1.0 version was released in September.

At last week’s PRI in Person event in Tokyo, many firms highlighted how they had already used TNFD’s LEAP approach to identify their most material risks, dependencies and impacts, with some also reporting these in annual sustainability reports alongside climate risks.

In addition, Japan’s Government Pension Investment Fund, the world’s largest asset owner (US$1.7 trillion AUM), recorded some notable nature-related dependencies in the business models of portfolio companies, using the LEAP approach, in its latest annual ESG report.

“The high level of market engagement that we saw and heard in Tokyo is a product of the open innovation approach that we took to developing the recommendations,” says Goldner. “We deliberately adopted the software model, where you put out an early release to encourage people to have a look at it. And we’ve benefited tremendously from the feedback that we’ve received over those four beta versions.”

The TNFD’s disclosure recommendations will remain fixed, but its guidance will continue to evolve to support market participants as they move to action.

According to Goldner, many firms plan to continue pilot testing on different parts of their business or their investment portfolio, having realised that they can make meaningful progress despite well-recognised capacity and data constraints. “They’ve learned that they can generate some very interesting insights about how nature risk is relevant to their business and what they need to start thinking about,” he says.

LEAP enables firms to locate, evaluate, assess and prepare to respond to nature risks, impacts and dependencies. But some have gone further, attempting to quantify the value at risk to their organisations. For some, this confirmed the size of the challenge ahead.

“Perhaps not surprisingly, that number has sometimes turned out to be bigger than their climate-related risk,” says Goldner. For such organisations, this realisation has reoriented their priorities. “Business plans have been very focused on climate risk for up to five to 10 years now. But, depending on sector and business model, there might be an even bigger source of risk facing the business in terms of nature risk.”

For this reason, Goldner describes the TNFD as providing a flashlight, exposing risks that have previously been hiding in the dark.

“What’s been really encouraging is the spread across geographies, sectors and biomes,” he tells ESG Investor “We saw pilot testing happening in all sorts of ecosystems, pretty much around the world and across most high nature-related risk sectors. It’s played a key role in informing not just the design of the general guidance, but also increasingly the sector guidance that we’re working on.”

The iterative nature of the TNFD’s mission is reflected in the fact that its final recommendations are in some respect incomplete. While the 14 recommended categories for disclosure are fixed, the 14 metrics for disclosure were published as a draft, awaiting market feedback. In some cases, there are placeholder metrics, for example for the ‘state of nature’ measurement, partly due to lack of scientific consensus.

Scientists are still learning about how to assess the state of nature in different contexts, says Goldner, as well as the resilience of ecosystems, including the biodiversity within those systems.

“Because the science is evolving, we didn’t want to pre-empt ongoing work around approaches to state of nature measurement. There are a number of tools and approaches out there, which we signpost to, but we felt it was premature to say there’s one approach or one metric that solves for that problem,” he says.

The TNFD expects to publish a paper on aggregate footprint metrics in the next few months to contribute to the wider discussion.

Blurred lines

It has been increasingly recognised that the biodiversity crisis, amid other risks to nature, has been developing alongside the climate crisis for at least half a century, as human progress has been prioritised ahead of respect for planetary boundaries.

Rising temperatures and emissions have been identified as one of the five key causes of biodiversity risk, while the Intergovernmental Panel on Climate Change (IPCC) and others have underline nature’s central role in mitigating global warming.

In short, nature and climate risks are so intertwined as to be virtually indistinguishable.

Having leveraged the framework of the Task Force on Climate-related Financial Disclosures to ease adoption of the TNFD’s recommendations, Goldner agrees that the blurring, or merging, will continue.

“I think it should. We’ve been bucketing a lot of things under the rubric of climate change, which are in fact nature risks,” he says.

Goldner says this is partly due to the fact that we experience climate change largely through its terrestrial rather than atmospheric impacts, as well as the tendency to compartmentalise complex problems.

“But of course, nature doesn’t do that. It’s a connected system. it’s important to understand that we’re making false distinctions in some cases. There are many contributing factors to most of the nature loss and climate risks that are ever-materialising,” he says.

“It’s in the best interests of business to start taking a more integrated approach to those issues. Hopefully the distinction will dissolve over time.”

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