Final recommendations on nature-related risks and disclosures aim to provide foundation for preserving the planet and financial market stability.
The Taskforce for Nature-related Financial Disclosures (TNFD) has published its final recommendations for nature-related risk management and disclosure, serving as a tool to “operationalise” the achievement of Target 15 of the Kunming-Montreal Global Biodiversity Framework (GBF).
According to Tony Goldner, Executive Director of TNFD, the recommendations have received growing support from investors, including the Norges Bank Investment Management (NBIM), the world’s largest sovereign wealth fund with US$1.3 trillion AUM, as well as asset managers such as US-based BlackRock and UK-based Aviva Investors.
“In discussions with institutional investors, they’ve made it clear that they are invested across asset classes, sectors, and geographies, leaving them with no escape from nature-related risks,” Goldner said, adding that the TNFD recommendations have also garnered significant interest from policymakers and regulatory bodies.
In June, the Dutch central bank – De Nederlandsche Bank (DNB) – released a landmark study, ‘Indebted to nature’, which found that Dutch financial institutions alone have €510 billion (US$545 billion) of exposure to biodiversity risks, with the assets at risk representing approximately 36% of assessed assets across Dutch banks, pension funds and insurers.
Speaking during the TNFD launch event on 18 September, Goldner noted: “Regulators are showing increased attention to nature risk […] as its foundational to preserving financial market stability.”
“We encourage international standard setters and regulatory authorities to consider how the [TNFD] framework can be rapidly adopted into corporate reporting requirements,” said James Alexander, Chief Executive of UK Sustainable Investment and Finance Association (UKSIF), adding that the International Sustainability Standards Board (ISSB) should “turn its attention” to introducing comparable and decision-useful disclosure standards for biodiversity and ecosystem services, drawing heavily on the TNFD’s finalised framework.
“A new biodiversity-specific standard will better support our members to address the financial risks posed by damage to the world’s biodiversity,” he added.
The TNFD said its recommendations aim to position nature risk alongside financial, operational and climate risk, inform better decision-making by companies and capital providers, and contribute to a shift in global financial flows toward nature-positive outcomes and the goals of the GBF.
“Nature loss is accelerating, and businesses today are inadequately accounting for nature-related dependencies, impacts, risks and opportunities,” said David Craig, Co-Chair of the TNFD, adding that nature risk is currently sitting in company cash flows and capital portfolios.
“The costs of inaction are mounting quickly,” he said, noting that businesses and financial institutions now have the tools they need to “take action”.
“Building on the language, structure and approach of the TCFD and consistent with the ISSB’s sustainability reporting baseline, the adoption of the TNFD recommendations represent a step-change in the momentum and capacity for business and finance to identify, assess and disclose their exposure to nature-related issues in a manner consistent with climate-related –reporting.”
Further, the TNFD recommendations are also aligned with the requirement of Target 15 of the GBF which calls for assessment and disclosure of nature-related risks, impacts, and dependencies, enabling companies and financial institutions to align their reporting with global nature-related policy goals, as they are now doing on climate related issues.
“Target 15 explicitly calls for mechanisms for companies to disclose risks, dependencies, and impacts, all of which are covered by TNFD,” said Goldner.
“TNFD is now the tool to operationalise the achievement of Target 15.”
A framework for nature
The TNFD recommendations and a suite of additional implementation guidance were developed from a two-year consultative process, including pilot testing by over 200 companies and financial institutions. The accompanying guidance is intended to help market participants get started with integrated assessment and corporate reporting related to nature risks, impacts and dependencies. The organisation rolled out its beta guidelines for consultation in four iterations in order to respond to market feedback.
The final recommendations are science-based and voluntary, building on the market’s experience with, and progress on, climate-related reporting. They are closely aligned to the disclosure framework developed by the Task Force for Climate-related Financial Disclosure (TCFD), incorporating the same four conceptual pillars: governance, strategy, risk and impact management, and metrics and targets.
In addition, they are consistent with the global sustainability disclosure standards of the ISSB and the impact materiality approach used by Global Reporting Initiative (GRI) and incorporated into the new European Sustainability Reporting Standards (ESRS), which underpin the EU’s Corporate Sustainability Reporting Directive (CSRD).
“Nature degradation is increasing and with six of the nine planetary boundaries already breached, nature risk is financial risk. Yet to date, businesses have mostly considered nature to be an unlimited and free provider of critical inputs into their operations and value chains,” said Elizabeth Mrema, Co-Chair of the TNFD, Deputy Executive Director of UNEP and former Executive Secretary of the Convention on Biological Diversity Secretariat that oversaw the COP15.
“Scaling up action to restore the resilience of nature is now a global policy and regulatory priority, and it is business-critical, posing significant long-term financial impact if not acted upon,” Mrema said, adding that extreme weather events, the collapse of ecosystems and the extinction of species presents physical risks to business.
“Policy making and regulatory attention stemming from growing community concern about nature loss also creates elevated transition risks,” she added.
“Business as usual is no longer an option and business and finance can no longer consider nature and biodiversity as just a corporate social responsibility issue. It is now squarely a central and strategic risk management issue.”
From voluntary to mandatory
The recommendations were launched at an event at the New York Stock Exchange as part of New York Climate Week.
The TNFD will now encourage and support voluntary market adoption of the recommendations. Like the TCFD, the TNFD will track voluntary market adoption on an annual basis through an annual status update report beginning in 2024.
“Many experts consider biodiversity loss a bigger threat than that of climate change and so it’s right that the TNFD is front-and-centre of New York Climate Week,” said Arjan Ruijs, Senior Responsible Investment Officer at advisory firm Cardano.
“While we don’t expect TNFD to become a regulatory disclosure requirement in the near-term, biodiversity and nature do represent material financial risks to investment portfolios,” added Ruijs, noting that pension scheme trustees could consider incorporating biodiversity and nature into their climate change risk and opportunities policy that underpins TCFD reporting.
Governments are expected to monitor closely the development and use of the TNFD framework before adopting it into their regulatory reporting rules.
In February, the UK government said it was “fully committed to supporting its progress and encouraging market engagement and capacity building through the TNFD’s UK National Consultation Group”.
Companies including pharmaceuticals firm GSK have already started to announce their intention to adopt the TNFD recommendations, with more companies expected to follow.
To encourage uptake and implementation a selection of companies has been invited to join the inaugural cohort of TNFD Adopters, which will be announced at the World Economic Forum at Davos in January 2024.
Standardising nature data
Non-profit disclosure platform CDP has declared its intent to align with the TNFD framework, signalling a significant expansion of its purview, which previously focused on climate, deforestation, and water security, but is broadening to encompass biodiversity and plastic pollution.
In 2022, CDP saw participation from more than 18,600 companies disclosing their data on climate, with nearly 4,000 contributing data on water security, and over 1,000 on forest-related matters. Additionally, approximately 7,700 companies responded to queries about biodiversity.
“CDP is delighted to announce our intention to align our global disclosure platform with the TNFD framework, which is an exciting opportunity for a unified response to the crisis of nature loss,” said Nicolette Bartlett, Chief Impact Officer at CDP, adding that its alignment with the TNFD framework is a critical step enabling access to standardised data, reducing the reporting burden on companies and “paving the way” for robust regulation on nature-related disclosure.
CDP’s annual disclosure request represents over 740 investors with assets exceeding US$130 trillion and over 340 major buyers with purchasing power exceeding US$6.4 trillion.
The disclosure platform’s alignment with the TNFD framework is expected to be completed by 2024.
CDP is already aligned with the Task Force for Climate-related Financial Disclosures (TCFD) and will be fully integrated with International Financial Reporting Standards (IFRS) S2 climate disclosure standard from 2024.
“The launch of the TNFD framework is undeniably a step in the right direction,” said Dr Kat Bruce, Founder Director at data and analytics provider NatureMetrics.
“We hope it will become one of those vital tools through which businesses can understand their risks and dependencies on biodiversity and make the business case for shifting global financial flows away from nature-negative outcomes toward nature-positive practices.”