Taskforce on Nature-related Financial Disclosures: LEAP into nature reporting

The Taskforce on Nature-related Financial Disclosures (TNFD), has published a risk management and disclosure framework for organisations to drive best practice reporting and action on evolving nature-related risks and opportunities.

It is designed for companies and financial institutions of all sizes across all sectors and value chains with the aim of supporting the identification and assessment of nature-related issues, regardless of whether organisations are required to disclose those to regulators and other stakeholders.

The TNFD officially launched on 4 June 2023 and has been given international political support through endorsement by G7 Finance Ministers. Stemming from existing recommendations on climate-related risk disclosures from the Taskforce of Climate related Financial Disclosures (TCFD), the TNFD disclosure framework is designed to meet the corporate reporting needs of a wide range of organisations across jurisdictions and sectors and assists in the provision of better information to support strategy and risk management.

With climate reporting and sustainability targets afoot, the TNFD disclosure framework aims to promote more informed investment and insurance underwriting decisions by financial institutions and enable a better understanding of nature-related risks and opportunities, based on insights into the dependencies and impacts on nature.

The TFND risk management and disclosure framework aims to:

• Drive alignment with emerging global baseline reporting under development by the International Sustainability Standards Board (ISSB)
• Provide adaptability to accommodate for size, scale, jurisdiction and regulatory disclosure
• Encourages early action given the urgent need to address nature loss and climate change in an integrated way with registrations open for an intent to adopt
• Provide a pathway to increase disclosure ambition over time as it becomes a growing strategic imperative for sound governance, strategy, risk management and capital allocation.

There is broad consensus that the acceleration of nature loss globally is an increasing source of risk to businesses and providers of financial capital. Yet most companies, investors and lenders are inadequately accounting for nature-related risks and opportunities in their decisions. The World Economic Forum (WEF)’s 2022 Global Risk Report identified large-scale nature degradation and biodiversity loss as one of the five most threatening long-term risks facing the world in the next five to 10 years.

The commitment by over 190 nation states to ambitious goals and targets under the Global Biodiversity Framework at COP 15 in Montreal, including 23 targets to be achieved by 2030 and four long-term goals for 2050 has also driven significant momentum for best practice accountability and reporting.

The LEAP approach: A starting point for nature-positive reporting

The Taskforce has developed an integrated approach for assessment and management of nature-related issues called LEAP. Comprised of four phases, the LEAP approach is voluntary guidance to support internal, nature-related risk and opportunity assessments within corporations and financial institutions. It is designed to be embedded in the enterprise risk management of organisations, recognising that organisations will have different levels of maturity. It is designed as iterative component for analysis rather than a linear step-by-step application from start to finish. LEAP encourages users to carefully consider the scope of their assessment before commencing and analysts and preparers are encouraged to consult with relevant stakeholders as they work their way through the LEAP approach before commencing or disclosing information. Not all that is identified, assessed and evaluated using the LEAP approach needs to be disclosed.

Locating the enterprises’ interface with nature

Evaluating the dependencies and impact

Assessing the material risks and opportunities; and

Preparing to respond to nature-related risks and opportunities and reporting.

Locating your interface with nature

• Identifying the business footprint by seeking the location of direct assets and operations, and seeking out related value chains (upstream and downstream)
• Identifying the nature interface by understanding which biomes and ecosystems these activities interface with and the current integrity and importance of the ecosystems at each location
• Identifying locations the organisation and its value chains operate in high integrity ecosystems with a focus on areas of rapid decline in ecosystem integrity, areas of high biodiversity importance and areas with potentially significant dependencies or impacts.
• Finally, considering what sectors, business units, value chains or asset classes are interacting with nature in priority locations.

Evaluating dependencies and impacts

• Seeking to understand what business processes and activities each priority location undertakes and what environmental assets and ecosystem services will have a dependency or impact on each priority location.
• Further understanding of what nature-related dependencies and impacts across our business are at each priority location
• Identifying the size and scale of the dependencies on nature in each priority location, and
• Quantifying the size and scale of nature impacts in each priority location.

Assessing material risks and opportunities

• Identifying the corresponding risks and opportunities of the enterprise
• Understanding the suite of existing risk mitigation and risk opportunity management approaches are already being applied
• Assessing the merits of additional risk mitigation and risk and opportunity management actions to be considered

Preparing to respond and report

• Consider strategy and resource allocation decision to be made as a result of the analysis and how performance and targets will be defined and measured
• Consider what will be disclosed and reported in line with the TNFD disclosure recommendations and where and how to present the relevant information.

The TNFD nature-related disclosure recommendations

What are the potential impacts on industry and financial capital investment?

The new reporting framework, that incorporates a greater consideration of biodiversity impacts and nature loss, will reshape the risk profile of capital investment in unsustainable industries. Greater risk premiums and constraints on capital flows may be placed on industries with known impacts on nature and biodiversity loss. Industries that are highly dependent on nature generate 50% of global gross domestic product (GDP), with the three largest sectors being construction, agriculture and livestock, and food and beverages. Taking early action to identify and report on nature related risks better prepares organisations to respond to the risk and opportunities, particularly where cost of capital and access to insurance is concerned. Natural capital has been undervalued and mispriced by the public and private sectors and a revision to this risk profile may lead to higher insurance premiums for those highly exposed industries.

Agriculture is the primary driver of biodiversity loss globally and is expected to be most heavily impacted. It is not well understood how regulators and financial institutions will respond to investment in existing agriculture and food production practices. A change in the global risk premium associated with biodiversity loss may drive up the cost of food production, reducing profitability of intensive farming sectors. This may drive greater consolidation across agricultural enterprises and further constrain competitive tensions across agricultural industries. However, a greater understanding of the inter-relationships with natural capital affords the opportunity for impacted industries to innovate and move towards more sustainable practices. This is observed across the construction sector, where green materials and sustainability targets have become the core driver of investment growth and successful tenders to major infrastructure projects.

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