Sustainablity

Introducing TNFD

22 June 2021

June saw the launch of a new initiative to deliver a sustainability framework to improve reporting on evolving nature-related risks and opportunities: The Task Force on Nature-related Financial Disclosures (TNFD).

The task force Consisting of approximately 30 members in total, the Task Force’s working groups will consult with a wide range of stakeholders to develop the nature-related financial disclosures that make up the framework. Following the G7 stating their support for the initiative, sustainability experts hope the new framework will drive a change in how organisations think about their relationship to nature and the risks of inaction.

With the framework set to launch in 2023, mandatory TNFD disclosures are unlikely in the next few years. However, given widespread adoption and investor support for TNFD’s climate-focused predecessor – the Task Force on Climate-related Financial Disclosures (TCFD) – it’s a safe bet that TNFD will play an important role in the future of sustainability reporting, strategy development and risk management.

 

What is TNFD?

TNFD aims to build upon the successes of TCFD, which led efforts to mainstream the understanding of climate-related financial risks and opportunities, and provide a consistent, comparable framework for climate-related reporting.

The result of TNFD’s work will be a complementary nature-related framework to drive better understanding and reporting of nature-related risks and opportunities. Organisations will be encouraged to use both frameworks in conjunction to achieve a fuller understanding of the impacts of environmental change on their operations.

 

Why are nature-related disclosures needed?

The World Economic Forum ranks biodiversity loss and ecosystem collapse as one of the top five risks of the next 10 years. With the majority of the world’s economic output at least moderately dependent on nature, failing to transition towards nature-positive business practices presents a significant risk to financial stability.

At the moment, most financial institutions and organisations have a limited understanding of the relationship between business operations and nature, and subsequently a lack of awareness around nature-related issues. To facilitate the global flow of capital towards nature-positive outcomes, the financial markets must be supported with consistent, comparable information on nature-related risks and opportunities. TNFD aims to provide organisations with the framework to produce these consistent disclosures, allowing investors to assess their nature-related risks as well as assisting organisations with their nature-related strategic planning and risk management.

 

What will the TNFD framework look like?

In its ‘Nature in Scope’launch document, the Task Force states the TNFD framework will follow TCFD in adopting a four-pillar approach structured around how companies operate: governance, strategy, risk management, metrics and targets. As in TCFD, we can expect to see supporting recommended disclosures under the four pillars.

 However, in contrast, TNFD will adopt a broader definition of ‘risks and opportunities’ than the TCFD framework. TCFD is primarily concerned with the risks and opportunities posed to the business by climate change and the transition to a low-carbon economy – an ‘outside-in’ view. To reflect the interdependency of business and nature, as well as emerging practice in managing environmental risks, the TNFD framework will expand the definition to include the risks and opportunities posed to nature by the business – an ‘inside-out’ view.

The launch document also sets out the Task Force’s ambition to align the TNFD framework with a wide range of other frameworks and standards relating to nature. As well as TCFD, the framework will be aligned to SASB, GRI, CDSB and the upcoming International Sustainability Standards Board which we outlined in the June edition of Gather Around.

 

What are examples of nature-related risks and opportunities?

Despite the expanded definition, the categorisation of nature-related risks and opportunities will be similar to the approach taken by TCFD.

Nature-related financial risks and opportunities

All financial risks and opportunities to the organisation as a result of impacts and/or dependencies on nature. The Task Force will give early consideration to subcategorise these risks and opportunities to align with the TCFD framework:

Nature-related physical risks and opportunities

Physical risks resulting from nature loss can be categorised as event driven (acute), or longer-term shifts (chronic) in the way in which natural ecosystems function—or cease to function. For example, losses to insect biodiversity present a chronic physical risk to agricultural companies that rely on insect pollination. Similarly, extreme weather events such as wildfires present an acute physical risk to lumber supply chains. On the other hand, physical opportunities may also have financial implications for organisations, such as increased resilience of business production processes or demand.

Nature-related transition risks and opportunities

Transitioning to a nature-positive economy may entail extensive policy, legal, technology and market changes. For example, legislation such as Habitat Directives to protect wildlife may present a transition risk to regional property developers. Transition opportunities may include scenarios such as technological developments in crop resistance, or increased consumer demand for nature-positive packaging.

Nature-related systemic risks

In addition to the financial risks to the organisation itself, impacts and dependencies across the economy can create nature-related systemic risk. Systemic risks may refer to critical risks to natural systems themselves, portfolio-level risks, or risks to system-wide financial stability.

 

When do you have to start thinking about this?

The TNFD work plan sets out the launch of the framework itself in 2023. Given the Government’s plans as a part of the Green Finance Strategy to implement TCFD disclosures across the entire economy by 2025, it’s possible that TNFD could make its way into policy relatively quickly after launch. This might mean mandatory TNFD disclosures, likely for a limited scope of listed companies, for 2024 accounting periods at the earliest.

As the framework is still under development, the best action you can take to get ready is to fully get to grips with TCFD given that TNFD will likely follow a very similar approach and set of principles to the climate-related framework.

 

For more on how TCFD fits into your reporting, see our recently published ‘Practical Guide to TCFD’. To request a copy of the Practical Guide, or to arrange a meeting to discuss TCFD, TNFD, or our work in corporate reporting, contact rochelle@gather.london.

 

The TNFD website can be found here.