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The Hard Work Begins

After intensive development, implementation of the recommendations of the Taskforce for Nature-related Financial Disclosures will still be a massive task, says Lindsey Stewart, Director, Investment Stewardship Research at Morningstar.

Most of my research covers engagement and voting on sustainability and governance topics. Which is to say, I spend most of my time writing about things people argue about.

So, for me, it makes a change to be able to cover a rare moment when asset managers, asset owners, and environmental activists found something it seems they could all agree on.

This week marked the launch of a new reporting framework from the Taskforce for Nature-related Financial Disclosures, or TNFD. The launch was much anticipated by the financial community and it comes at a critical moment for those concerned about the effects of human activity on the environment.

The COP27 climate agreement last November highlighted the “urgent need” to address “the interlinked global crises of climate change and biodiversity loss… as well as the vital importance of protecting, conserving, restoring and sustainably using nature and ecosystems for effective and sustainable climate action”.

Sense of urgency

These matters are certainly becoming more urgent. This month, scientists informed us that six of nine planetary boundaries essential to life on Earth have been breached. Nature-related issues like deforestation, freshwater depletion, and the introduction of “novel entities” (mostly plastics) into the ecosystem have all played a role in this, alongside the central issue of climate change.

The COP27 agreement was swiftly followed by the Kunming-Montreal Global Biodiversity Framework (GBF) agreement in December 2022, which aims to “take urgent action to halt and reverse biodiversity loss” by 2030. Target 15 of the GBF encouraged policy makers to “ensure that large and transnational companies and financial institutions… regularly monitor, assess, and transparently disclose their risks, dependencies and impacts on biodiversity”.

The TNFD launch goes a long way towards realising the ambitions of Target 15. The framework includes 14 recommended disclosures which cover a reporting organisation’s governance, strategy, risk and impact management, and metrics and targets. The four pillars are intended to match those of the Taskforce for Climate-related Financial Disclosures (TCFD), which after six years have gone on to form the foundation of the main regulations and reporting standards addressing the financial and strategic impacts of climate change. In response to feedback, the TNFD has also included recommendations addressing social themes, value chain impacts, and disclosures about plastics.

Using the TCFD as a blueprint has enabled the TNFD to develop a reporting framework in just over two years. However, despite the gargantuan effort it has taken to get to this stage in such a short time, the hard work really begins now. Investor-focused reporting on nature-related themes will require new data, collected in innovative ways, and with much more location-specific information than climate-related reporting has so far required.

Yet a wide swathe of institutional investors and companies are keen to get started. Last October, over 300 business and finance institutions called for nature impact disclosures to be made mandatory by 2030.

Asset managers and asset owners addressing the issue most want to know about material biodiversity impacts and dependencies and how these link to climate action. Improving reporting and transparency is also seen as a key factor.

Many of them are keenly awaiting new corporate disclosures under the TNFD framework to give them the information they need to allocate capital effectively and according to their clients’ and beneficiaries’ sustainability preferences. Research from Morningstar last December indicated that several asset managers anticipated the TNFD to be a valuable resource, and that they would expect TNFD-aligned disclosures from companies as soon as is practical.

Stewardship expectations

Since then, we’ve also seen the launch of the Nature Action 100 engagement initiative, in which institutional investors aim to “drive greater corporate ambition and action in eight key sectors that are deemed to be systemically important in reversing nature and biodiversity loss by 2030”.

All this means the demand for nature-related reporting from companies, and the stewardship expectations of investors in this area, is likely to increase markedly in the coming year. Investor engagement with companies on nature-related risks certainly overlaps with climate, but there are still some important differences.

Climate-related engagement tends to focus on reducing greenhouse gas emissions, along with a more recent focus on the wider societal impacts of transition to a lower carbon economy. However, nature and biodiversity risks are much more location-specific and lack a central, net-zero-equivalent focal point. All this means that key focus areas for engagement and investor collaboration on nature are harder to identify and agree on than for net zero. And, of course, we still need more and better data.

The TNFD framework is certainly a huge step forward, but the hard work begins now.

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