Commentary

The B in ESG – Part 1: Frameworks for Action

Dr Anthony Kirby, Head of Regulation and Risk for Asset Management and Capital Markets in Europe at EY, considers how asset managers can put TNFD recommendations into practice.

Most of us know nature when we see it, and already recognise the critical role played by natural ecosystems in ensuring the continuity of our species. Many are also aware that our planet is facing environmental crises, with biodiversity and ecosystem loss being particularly alarming, with a devastating 69% decline in wildlife populations on average since 1970. Rather fewer of us fully understand the relative importance played nature-positive approaches – the term used to describe a world where natural species and ecosystems are being restored and is regenerating rather than declining. Put simply, nature-positive approaches enrich species biodiversity and reduce the potential for pandemic risks through ensuring that water is purified and (post-COP28) that carbon is stored effectively for posterity.

The Taskforce for Nature-related Financial Disclosure (TNFD) was founded in June 2021 to provide a framework for corporations and financial institutions to assess, manage and report on their dependencies and impacts on nature beyond climate change. The TNFD adopted an analogous four-part framework approach leveraging the work done by the earlier Task Force on Climate-related Financial Disclosures (TCFD). The TNFD currently comprises two co-chairs, a secretariat of 26 full-time employees, and 40 taskforce members (plus an additional 46 alternates), with taskforce members drawn from corporations, financial institutions, professional service firms, and vendor providers. Besides biodiversity considerations, climate change mitigation/adaptation and social/human rights impacts are also built into the architecture of the TNFD.

Nature’s ‘four realms’

The TNFD defines ‘nature’ as a construct of four realms – land, ocean, freshwater and atmosphere – and these provide an entry point for understanding how organisations and people depend on and impact natural capital, which the TNFD defines as natural resources that combine to yield a flow of benefits to people. Just as in the financial world, where assets exist that give rise to flows of revenue, nature consists of stocks of environmental assets that give rise to associated flows of benefits to people and the economy. The eroding diversity in natural species is a major cause for concern. The UN Food and Agriculture Organization (UN FAO) says nearly 10,000 wheat varieties were in use in China in 1949, but only 1,000 were left by the 1970s. Between the 19th and 20th centuries, 95% of cabbage, 91% of corn, 94% of pea, and 81% of tomato varieties used in the United States were lost.

The TNFD formally launched its final recommendations on 18 September 2023. Although TNFD reporting is not yet mandatory for most countries which have published ESG taxonomies, investors could start 2024 by asking for more corporate disclosures on their impact on nature, thus assessing their own exposures to a range of biodiversity risks overlapping with climate, pollution on land and pollution in water. The TNFD’s LEAP approach (Locate, Evaluate, Assess, Prepare) has proved a popular and easy-to-apply methodology for helping companies report their sustainable investing activities in accordance with Global Reporting Initiative (GRI) disclosures or regulatory directives such as the Corporate Sustainability Reporting Directive (CSRD). The TNFD has committed to tracking voluntary market adoption on an annual basis and will publish an annual status update report beginning in 2024.

The variability of life

Biodiversity can be thought of as the wide-ranging variety of life forms that inhabit a particular habitat or ecosystem – in other words, the variability among living organisms from all sources, (including terrestrial, marine, and other aquatic ecosystems), and the ecological complexes of which they are a part. This includes variation in genetic, phenotypic, phylogenetic, and functional attributes, as well as changes in abundance and distribution over time and space within and among species, biological communities and ecosystems. The Global Impact Investing Network (GIIN) and the International Panel on Climate Change (IPCC) define biodiversity in their 2018 glossary as “the variability among living organisms from all sources, including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems”.

Themes in biodiversity and ecosystems include strategic objectives and delivery models that seek to minimise threats to biodiversity by safeguarding, conserving, maintaining, restoring and/or improving the diversity of plants, animals, and ecosystems and their natural habitats and sharing the benefits arising out of these activities equitably. However, one of the key challenges arising in respect of nature-related reporting is the inherent difficulty of sourcing consistent data capable of calibrating nature-related impacts, given that there are no commonly-agreed metrics for quantifying nature-related impacts, and given that natural ecosystems are neither bounded nor constrained by territorial considerations – at least for the moment.

Delivery models

The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) and the global investor engagement initiative Nature Action 100 (NA100+) have recognised the importance of ensuring that nature-related disclosures are clear, complete, consistent, and substantiated. They recognise delivery models such as

  • GLOBIO – Calculates local terrestrial biodiversity intactness, expressed by the mean species abundance (MSA) indicator, as a function of six human pressures: land use, road disturbance, fragmentation, hunting, atmospheric nitrogen deposition and climate change;
  • PREDICTS – The Natural History Museum Projecting Responses of Ecological Diversity In Changing Terrestrial Systems project calculates the biodiversity intactness index (BII) using data from ecological studies conducted around the world. This data includes around 54,000 species, encompassing not only birds and mammals, the groups most often used in biodiversity indicators, but also plants, fungi and insects;
  • IBAT – The TNFD’s Integrated Biodiversity Assessment Tool can be used to screen for areas of biodiversity importance using the World Database of Protected Area, the World Database on Key Biodiversity Areas, and the International Union for Conservation of Nature (IUCN) Red List of Threatened Species and associated metrics (e.g. PDF – potentially disappeared fraction and STAR – species threat abatement and recovery). The IBAT biodiversity map offers a rapid visual screening for critical global biodiversity areas.

The TNFD also specifies how corporations, investor analysts, regulators, accounting firms and exchange issuers can make informed and robust capital-related allocation decisions based on clarity, confidence and trust in natural capital and environmental opportunities and risks disclosed by a company, alongside climate change. The Partnership for Biodiversity Accounting Financials (PBAF) defines natural capital as the elements of the natural environment that provide valuable goods and services to society. It applies an economic lens to the world’s stocks of natural assets — like forests, rivers, and soil — and how society and businesses rely on them to function. The TNFD recommends that organisations adopt the Science-Based Targets Network’s (SBTN) ‘mitigation hierarchy’ which sets out the proactive steps and actions which anticipate, avoid or minimise biodiversity-related risks and resulting impacts on affected communities and the environment.

According to the OECD, natural capital is generally considered to comprise three principal categories: natural resource stocks, land and ecosystems. All are considered essential to the long-term sustainability of development for their provision of ‘functions’ to the economy, as well as to mankind outside the economy and other living beings. The ENCORE system – Exploring Natural Capital Opportunities, Risks and Exposure – is a key tool developed by the UN Environment Programme World Conservation Monitoring Centre (UNEP-WCMC) supporting the TNFD’s LEAP approach, helping financial institutions take their first steps towards understanding their dependencies and impacts on nature.

Supported by data

It is generally accepted that governance, controls and policies/procedures supported by data collection will be a critical sustainable investing theme this year, to support the alignment of theme-specific disclosure recommendations with the reporting standards set by the International Sustainability Standards Board and the CSRD’s European Sustainability Reporting Standards. My next article will explore how regulators are gearing themselves to respond to and drive the changes ahead.

Dr Anthony Kirby is writing in a personal capacity and his views on this subject do not reflect those of EY. 

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