The Taskforce for Nature Related Financial Disclosure (TNFD) has launched its v.2 beta framework for comment. The second version adds new metrics, sector guidance and support in terms of scoping questions, while pilot testing of the first framework started in June 2022.
The TCFD’s work is based on an understanding that economies are embedded within nature, not external to it – recognising that means that investors and corporates alike must better understand and disclose the risks they face. As the UN’s Special Envoy for Climate Action and Finance Mark Carney has said: “We now have to shape [the finance sector’s commitments to net zero] …to include biodiversity and nature.”
Push for nature-related risks to be identified, assessed and disclosed
It is widely accepted that more than half of the world’s economic output – $44 trillion of economic value generation – is moderately or highly dependent on nature. Mainstreaming biodiversity into the financial sector is one of the prerequisites to reversing nature loss – the recorded extinction of 83% of wild mammals and 50% of plants therefore represents significant risk to corporate and financial stability. At the same time, according to the World Economic Forum (WEF), action for nature-positive transition could generate up to $10.1 trillion in annual business value and create 395 million jobs by 2030.
Regulators and investors are increasingly pushing for nature-related risks to be regularly identified, assessed and disclosed by businesses. There is significant interplay between natural capital and social considerations, such as supply chain management and the need to engage with local communities that rely on those resources for their survival. In countries where natural capital is a significant source of income, such as through agriculture or tourism, policymakers will need to manage the impacts of activities to ensure they are sustainable in the long term.
Sectors to face moderate to very high natural capital risk
In 2021 global ratings agency Moody’s warned in a report that over $2 trillion of rated debt was highly exposed to natural capital impact or dependency. It warned that regulatory and investor interest in natural capital and biodiversity continues to accelerate, in large part since biodiversity and natural capital credit considerations involve both environmental and social risks.
In fact, the report stated not only that 12 sectors, including all extractive industries like mining, with $2.1 trillion in debt face high or very high natural capital risk. It also identified 16 other sectors, including homebuilding, retail and apparel, with $8.3 trillion in debt, that currently face moderate exposure to natural capital risks. Some of these sectors could face high exposure in the future as new regulations are implemented. For example, another Moody’s report found that of 5,300 large publicly traded companies 38% have at least one facility associated with habitat loss.
TNFD to help realign global capital investment towards nature positive outcomes
The idea behind the TNFD was to build on the success of the Task Force on Climate-related Financial Disclosures (TCFD), which has become instrumental in mainstreaming the issue of climate-related financial risks. The TNFD’s framework for nature-related risks is expected to complement the TCFD’s climate-related framework, to give companies and financial institutions a complete picture of their environmental risks.
As it stands, the TCFD is the leading climate reporting framework for many jurisdictions, with TCFD reporting already mandatory for companies with a UK premium listing. It works on the basis of comply or explain why you haven’t complied. Given the close links between the TNFD and the TCFD, a similar approach is expected to be taken with the TNFD. In a similar vein, given the speed at which the TCFD moved from a voluntary framework to a mandatory form of disclosure, companies need to prepare themselves for disclosure of nature risk.
The TNFD’s second beta framework retains three core elements of the first framework. The first of these are fundamental nature-related concepts and definitions. The second is guidance for corporates and financial institutions to incorporate nature-related risk and opportunity assessment into their enterprise strategy and risk management processes. This is expected to inform a range of corporate and capital allocation decisions, including those related to reporting and disclosure. The third is draft disclosure recommendations for nature-related risk, based on its integrated assessment process through the Locate-Evaluate-Assess-Prepare (LEAP) approach.
Feedback on the second beta version is ongoing. The Taskforce has committed to delivering a final framework for organisations to report and act on evolving nature-related risks by 2023. The Taskforce plans to release v0.3 and v0.4 of the beta framework in November 2022 and February 2023, before the launch of the Taskforce’s final recommendations in September 2023. These final recommendations are expected to provide guidance on how to address the need to realign global capital investment away from exploitative and nature-negative business models towards more nature positive outcomes, supporting an overall shift in global financial flows.