Task Force on Nature-related Financial Disclosures (TNFD)
ISSUES TNFD SEEK TO ADDRESS
The TNFD standards seek to address several critical problems related to the financial sector’s approach to environmental risks and opportunities associated with nature. The specific problems they aim to solve include:
Lack of Consistency in Disclosure
One of the key issues the TNFD aimed to address is the lack of consistency and standardization in how financial institutions and companies report and disclose their nature-related financial information. This lack of consistency makes it difficult for investors, regulators, and other stakeholders to assess and compare the environmental performance and risk exposure of different organizations.
Many companies and financial institutions do not adequately disclose their nature-related risks and opportunities. This can result in a lack of transparency, preventing investors and stakeholders from making informed decisions about investments, lending, and business relationships.
Mispricing of Risks
Failure to account for nature-related risks and dependencies in financial decision-making can lead to the mispricing of assets and liabilities. This can result in a misallocation of capital, potentially leading to financial instability and losses for investors and financial institutions.
The current financial system often incentivizes practices that harm the environment, as it does not account for the external costs of activities that degrade natural resources and ecosystems. The TNFD aims to encourage a shift toward more sustainable and responsible financial practices.
Existing financial regulations may not adequately address nature-related risks and disclosures. The TNFD standards are expected to help fill regulatory gaps and provide guidance to financial regulators on how to integrate nature-related considerations into their supervisory frameworks.
The Taskforce on Nature-related Financial Disclosures (TNFD) was officially launched on June 2021 and has received global political backing, with endorsement from the G7 Finance Ministers. Similar to the established guidelines for disclosing climate-related risks by the TCFD, the TNFD proposes new reporting requirements for financial institutions and businesses starting in 2023, aimed at capturing risks associated with the natural environment.
Its approach is based on the following key elements:
These follow the four pillars of governance, strategy, risk management, and metrics and targets, and focus on how an organization’s operations and decision-making consider nature-related risks and opportunities.
Nature-related Risk and Opportunity Assessment
The TNFD developed the LEAP (Locate, Evaluate, Assess, Prepare) approach, a voluntary guidance to help organizations incorporate nature considerations into their risk management and decision-making processes.
Dependencies and Impacts
The framework addresses how companies depend on nature (e.g., water quality, insect pollination) and their impacts on nature (e.g., pollution, climate change). This includes both short-term risks (like oil spills) and long-term systemic risks (such as ecosystem collapse).
Metrics and Targets
The TNFD framework includes a set of “core global” metrics applicable to all sectors, along with additional metrics for specific business models and nature-related issues. These metrics cover various aspects such as land use change, pollutants, water usage, and biodiversity impacts.
Sector and Biome Guidance
The TNFD provides additional guidance for specific sectors and biomes. For instance, financial institutions have detailed guidance on how to incorporate nature-related considerations into their investment strategies. Biome guidance helps organizations understand how their activities interact with different ecosystems and the services they provide
Engagement with Indigenous People and Local Communities
The TNFD emphasizes the importance of engaging with indigenous people and local communities who are directly impacted by nature-related issues. This includes conducting due diligence on human rights and obtaining free, prior, and informed consent from these communities.
AREAS OF COMPLEXITY
The TNFD framework introduces several layers of complexity for businesses:
Lack of Straightforward Metrics
Developing disclosures regarding nature-related risks presents a challenge due to the absence of straightforward metrics like global temperature or greenhouse gas emissions, which have been instrumental in mobilizing action against climate-related risks. Additionally, nature-related risks involve a more intricate set of variables and are often specific to particular regions, making it harder to transfer mitigation efforts across different geographical areas. Due to that complexity, the TNFD’s strategy moves away from reporting on activities that harm nature and focuses on activities that benefit nature. Consequently, the forthcoming disclosures will encompass an assessment of both the risks and opportunities associated with nature-related factors, covering physical, transitional, and systemic aspects.
Risk Identification and Risk Management
Businesses must now recognize and evaluate risks that were previously overlooked, including the potential impact of biodiversity loss on operations. The collection and analysis of data pertaining to nature-related effects and interdependencies must be precise, often necessitating the adoption of novel methodologies and metrics. The incorporation of TNFD-aligned risk assessments into financial institution’s due diligence processes involves understanding the potential for nature-related financial risks to affect asset values and investment returns.
Enhanced Reporting and Transparency
The TNFD raises the bar for reporting standards within the financial services industry. Enhanced transparency around nature-related risks will become a benchmark for stakeholders, including regulators, investors, and clients who are increasingly aware of and interested in the sustainability profiles of their financial service providers.
Businesses need to integrate nature-related risk considerations into their core strategies, aligning environmental sustainability with business resilience.
As regulatory bodies worldwide begin to mandate nature-related disclosures, companies must stay ahead of legal requirements to avoid penalties. Compliance with TNFD requirements will become a factor in maintaining market reputation and avoiding regulatory scrutiny, as nature-related disclosures become standard practice.
There is a growing expectation for transparency around risks associated with the natural, necessitating a dialogue with investors, customers, and the wider community.
TNFD recommendations were published in September 2023. While recommendations are not binding upon companies, various companies have started to announce their intention to adopt the Recommendations while the TNFD is anticipating more companies to follow soon.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, T3 Consultants Ltd, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.