As we continue to grapple with the twin challenges of climate change and biodiversity loss, the Taskforce on Nature-related Financial Disclosures (TNFD) has emerged as a vital initiative. Here’s what you need to know about it.
By providing organizations with a comprehensive disclosure framework for reporting on biodiversity risks, the TNFD works to enhance the integration of nature-related risks into business decision-making for companies and financial institutions. In doing so, it aims to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.
This blog post delves into the significance of the TNFD, explores why biodiversity loss is a growing business concern, explains the concept of integrated climate and nature disclosures, and outlines steps organizations and investors can take to comply with the TNFD.
Why was the TNFD created?
The TNFD framework was established in response to the escalating threats posed by biodiversity loss and ecosystem degradation. Recognizing the urgent need for action, the TNFD aims to improve the availability and accuracy of data and information related to nature-related risks. By creating a reporting framework, the TNFD seeks to enable companies and financial institutions to integrate these risks into their decision-making processes effectively. The framework, planned for launch in September 2023, will be aligned with the four pillars of governance, strategy, risk management, and metrics and targets, similar to the Taskforce on Nature-related Financial Disclosures (TCFD).
Through its comprehensive approach, the TNFD aims to drive awareness, accountability, and action toward safeguarding biodiversity and promoting sustainable practices across industries.
Why should we be concerned about biodiversity loss?
Human activities are driving an unprecedented decline in biodiversity. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) identifies five major pressures that contribute to biodiversity loss and ecosystem degradation. These are: changes in land and sea use, pollution, overexploitation, climate change and invasive species.
Biodiversity loss is not just an environmental issue; it also poses significant threats to economies and human well-being. Earth's biodiversity underpins the essential ecosystem services upon which our societies and economies rely. These services include clean air and water, soil fertility, pollination, natural pest control, and climate regulation.
For instance, disruptions in ecosystem services increase vulnerability to natural disasters as we lose natural protection against floods and coastal erosion. Biodiversity loss also impacts food security, as it reduces the diversity of crops, livestock, pollination and aquatic resources available for sustenance and economic livelihoods.
What consequences can biodiversity loss have for companies?
As biodiversity declines, companies face several significant risks and challenges. Among the key physical risks is the disruption of supply chains and business operations. Many industries rely on natural resources, such as timber, minerals, agricultural commodities, and pharmaceutical ingredients. Declining biodiversity and the degradation of ecosystems can lead to scarcity or reduced quality of these resources, increasing costs, and jeopardizing the continuity of production processes. Furthermore, companies heavily dependent on services such as water availability, or climate regulation, may experience disruptions that hinder their operations and profitability.
Reputational risks are another consequence of biodiversity loss. In an era of increasing environmental consciousness, stakeholders, including customers, investors, employees, and communities, are becoming more concerned about corporate sustainability and responsible environmental practices. Companies associated with biodiversity loss or environmental degradation may face public scrutiny, backlash, and damage to their brand reputation. This can translate into financial losses, decreased consumer trust, and difficulties in attracting and retaining top talent.
Legal and regulatory risks also come into play. Governments and regulatory bodies are increasingly recognizing the importance of biodiversity conservation and enacting stricter environmental regulations.
Article 29, a significant regulation in France, mandates financial institutions (FIs) to report on biodiversity risks. Recognizing the critical role of the financial sector in addressing biodiversity loss, this regulation requires FIs to assess and disclose their potential impacts on biodiversity.
The European Law on Imported Deforestation is an important regulation aimed at tackling deforestation associated with imported agricultural commodities. Deforestation contributes significantly to global biodiversity loss and climate change. This law seeks to address the issue by imposing regulatory measures on companies importing products linked to deforestation, such as soy, palm oil, beef, and timber.
Non-compliance with biodiversity-related regulations may result in fines, legal penalties, or restrictions on business operations. Additionally, companies operating in sectors with high biodiversity impact, such as agriculture, mining, or infrastructure development, face heightened scrutiny and the need to navigate complex permitting processes.
On the other hand, embracing biodiversity conservation and sustainable practices can offer companies numerous opportunities. Companies that proactively integrate biodiversity considerations into their strategies and have a robust nature related risk management process in place, can gain a competitive advantage by differentiating their products or services, enhancing brand value, and accessing new markets. Moreover, investing in nature-based solutions and innovative technologies can drive operational efficiencies, reduce costs, and promote long-term sustainability.
What are integrated climate and nature disclosures?
Integrated climate and nature disclosures involve reporting on both climate-related and nature-related opportunities and risks. While climate disclosures have gained prominence through initiatives like the Task Force on Climate-related Financial Disclosures (TCFD), disclosures specifically focusing on nature-related issues are relatively new. Integrated disclosures allow organizations to assess and communicate their impacts and dependencies on both climate and biodiversity, promoting a holistic approach to sustainability. Double materiality is a very important concept when it comes to the TNFD – you can read more about it here.
By considering physical, transition, and systemic factors, these disclosures provide a comprehensive understanding of the relationship between nature and business operations.
Integrated disclosures encompass several key elements. Firstly, they involve assessing an organization's exposure to risks such as biodiversity loss, deforestation, land degradation, or water scarcity. This requires companies to identify and evaluate the dependencies and impacts of their operations and supply chains on natural capital and ecosystem services. Secondly, integrated disclosures address the opportunities that arise from investing in nature-positive activities, such as ecosystem restoration, sustainable land use practices, or the development of nature-based solutions. Companies can explore how integrating biodiversity considerations can enhance business resilience, reduce risks, and create value.
To ensure meaningful integrated disclosures, organizations should adopt a comprehensive framework that covers various aspects. This framework should incorporate governance mechanisms, outlining responsibilities, accountabilities, and oversight related to nature-related opportunities and risks. It should also include a robust strategy that aligns with biodiversity global goals and integrates nature considerations into core business objectives. Furthermore, effective risk management processes should be in place to identify, assess, and mitigate nature-related risks. Lastly, metrics and targets should be established to monitor progress, measure performance, and communicate the organization's commitment to biodiversity conservation.
Are the recommendations of the TNFD mandatory or voluntary?
The TNFD operates as a voluntary, market-led initiative that aims to provide practical recommendations and guidance for market participants on a voluntary basis. The decision to transition from voluntary market practice to mandatory disclosure requirements lies with government regulators in each jurisdiction. The TNFD has garnered significant interest from policymakers and regulators in various jurisdictions and is actively engaging with them and international standards-setting bodies during the consultation process with market participants. This collaborative approach ensures that the TNFD's recommendations align with regulatory frameworks and contribute to the development of effective disclosure requirements in different regions.
Who are the target users of the TNFD framework?
The TNFD aims to provide recommendations and guidance for various market participants, including investors, banks, insurance companies, analysts, corporates, regulators, stock exchanges, and accounting firms. By offering clarity, confidence, and trust in data related to nature-related risks, the TNFD supports informed decision-making in capital allocation, lending, insurance, valuation, and corporate strategy. It also seeks to ensure that regulators incorporate nature-related risk considerations into existing disclosure mechanisms and standards.
Furthermore, the TNFD encourages stock exchanges to adopt listing requirements related to nature-related risks and promotes comprehensive assurance by accounting firms for companies integrating nature risk and opportunity considerations.
How can financial services firms prepare for the TNFD?
Adopting the TNFD framework is a five step approach.
1. Understanding and awareness
To begin with, organizations should build awareness and understanding of the TNFD and its objectives. This involves educating key stakeholders, including board members, executives, and relevant staff, about the importance of biodiversity and the implications of nature-related risks.
2. Biodiversity risk identification
The next step is to assess and identify nature-related risks and dependencies within the organization's operations and value chains. This requires conducting thorough risk assessments, considering direct and indirect impacts on natural capital and ecosystem services. Organizations should also explore opportunities for nature-positive activities, such as ecosystem restoration, sustainable sourcing practices, or investment in biodiversity conservation projects.
3. Incorporating biodiversity into governance
Integrating biodiversity considerations into governance structures and decision-making processes is critical. This involves embedding biodiversity objectives and targets into strategic planning and ensuring that the board of directors and executive leadership are actively engaged in driving biodiversity conservation efforts.
4. Introducing risk management processes
Risk management processes should be enhanced to address evolving nature-related risks effectively. This includes developing mitigation strategies, implementing monitoring systems, and integrating biodiversity criteria into due diligence processes, supplier assessments, and investment decisions. Collaboration with stakeholders, including suppliers, customers, and local communities, can also foster collective action and promote sustainable practices across the value chain.
5. Reporting and disclosure
When it comes to TNFD disclosures, organizations should strive for transparency by disclosing relevant information on their nature-related risks, dependencies, and nature-positive activities. This can include metrics, targets, and progress reports that demonstrate the organization's commitment to biodiversity conservation. Engaging with investors and financial institutions that endorse the TNFD can also provide valuable guidance and support in aligning reporting practices.
In summary
The TNFD represents a significant step forward in addressing biodiversity loss and integrating nature-related risks into financial decision-making. As the world acknowledges the critical importance of preserving and restoring our natural ecosystems, organizations must embrace the TNFD framework to effectively measure, manage, and report on their biodiversity impacts. By doing so, businesses can contribute to the protection of biodiversity, enhance their resilience, and drive positive change towards a sustainable and nature-positive future. Through collaborative efforts and collective action, we can safeguard biodiversity and secure a prosperous and resilient planet for generations to come.
