Businesses across the globe rely on nature. From raw materials for manufacturing, to food production, to medical ingredients or tourism – nature services are integral to all businesses. But nature is on the decline, which is putting those services at risk.
The final TNFD framework helps firms direct financing to support nature positive outcomes. This will help protect nature and the essential services it provides. It does this by asking firms to disclose their interactions with nature, helping investors make informed decisions and driving sustainable investment.
There’s also financial stability to consider. As nature declines, some business models will become unsustainable and whole sectors may no longer be viable. This presents a systemic risk to the financial institutions that support those businesses with loans, credit and investment. So, firms need to manage these risks carefully and find opportunities to support the transition to nature positive financing.
Following a familiar pattern, TNFD is based on the Taskforce on Climate-related Financial Disclosures (TCFD) framework. This is by design to encourage early adoption and promote alignment with existing risk management approaches. When creating the new framework, the TNFD considered:
There are six general requirements, which cover all four TNFD pillars.
1 Approach to materiality: Firms should outline their approach to materiality, referencing any relevant regulations or standards. This will help readers understand the wider context of the disclosure and its significance.
2 Scope of disclosures: Firms should include details of the scope of the disclosure, including areas of the business and wider value chain. This includes referencing the specific elements of the framework they are disclosing against.
3 Consideration of nature-related issues: Firms should disclose any dependencies with, or impacts on, nature – including details of any risks or key opportunities.
4 Location: Firms should disclose where interactions with nature are taking place. The geography could heighten or increase the risk profile.
5 Integration with other sustainability issues: Firms should state how they are integrating the TNFD framework with broader sustainability and climate related disclosures. This includes any key alignments or trade-offs.
6 Stakeholder engagement: Firms should think about how they are engaging with their stakeholders when putting together the report.
TNFD recommended disclosures cover four pillars, in line with the TCFD structure, with 14 recommendations. For each pillar, firms should consider nature-related factors covering impacts, dependencies, risks and opportunities.
Firms should disclose their relevant governance arrangements. Recommended TNFD disclosures cover board oversight and management’s role in assessing and managing nature-related factors.
To achieve this, firms need to think about culture, tone from the top, roles and responsibilities and accountability processes. Firms are expected to get the right tools and metrics in place, and establish an effective reporting and MI framework to help senior management make informed decisions. Interdepartmental working groups, with effective training, can embed the right mindset, improve stakeholder engagement and promote oversight across the organisation. This includes upskilling boards to make sure nature related issues are an integral part of decision-making processes.
Firms should disclose the practical impact of nature-related factors on their strategy, business and financial planning. Recommended TNFD disclosures cover nature-related factors in the short-, medium- and long-term. This includes the effect on planning; the impact on resilience; and the location of nature-related assets or activities. When considering the strategy, firms should think about the impact of physical, transition and legal aspects.
Firms should disclose how they are identifying, managing, and assessing nature-related issues. Recommended TNFD disclosures cover processes for identifying nature-related factors in direct operations, across the value chain and in financed activities and assets; actions taken in response; integration across the firm’s wider risk management framework; and how the firm is engaging with relevant stakeholders.
Scenario analysis should be integral to help firms identify how nature loss can affect their business in the long term, informing risk management, strategy and resilience processes. Scenarios should consider science-based targets and build on any scenarios already available. They should also include metrics that relate to financial impacts and are comparable across a range of scenarios.
Firms should state the nature-related metrics and targets they are using in their disclosures and supporting processes. Recommended TNFD disclosures cover the metrics the firm uses: to assess and manage material risks and opportunities relating to nature; to manage dependencies and impacts; and all relevant targets and goals.
Metrics should be science based, but practical, and available to support annual reporting cycles. Incorporating financial activities and the full value chain, they should align to global policy goals, and reflect both positive and negative impacts. When putting together the relevant metrics, it is important to consider the specific biome, sector and location they apply to. All firms should have core metrics, assessing both dependencies/impacts and risks/opportunities, but they should also consider additional metrics, which are specific to their sector, location, and circumstances, and take wider objectives and impacts into account.
The TNFD framework outlines the LEAP approach, designed as an internal due diligence process to help firms understand and manage their interactions with nature. The approach is not a mandatory element of the TNFD framework, but can be a useful tool to help firms get started. There are four key steps within the LEAP approach:
Locate their interface with nature. Firms need to think about their business footprint, the biomes and ecosystems they interact with, the locations they impact, and the sectors or business units affected.
Evaluate dependencies and impacts. This includes identifying environmental assets and ecosystem services, finding any dependencies or impacts, and undertaking a dependency and impact analysis.
Assess risks and opportunities for the business. Firms need to consider their existing mitigating controls and opportunity management processes, establish where they need to undertake further work, and consider material elements for inclusion in the TNFD disclosure.
Prepare to respond to those risks and opportunities and report on them. This includes strategy and resource allocation, and disclosure actions – such as what to include in the disclosure and how (and where) to present those findings.
While the final TNFD framework is voluntary, industry leaders are already implementing it, and in some cases, applying it beyond the pilot stage. To draw parallels, TCFD was also initially launched on a voluntary basis, but the UK government has since adopted it as an integral element of the disclosure framework for UK businesses.
The International Sustainability Standards Board, also used the framework to create IFRS S1 and S2, and has since taken over monitoring responsibilities from the TCFD. The FCA will adopt these standards across their disclosure framework moving forward. TNFD could well follow the same trajectory, so getting a head start is essential – recognising that firms' ambitions and capabilities in this space will grow over time.
To get started, look at your TCFD implementation and consider any synergies you can make to implement TNFD. But it is important that firms tailor their approach effectively to maintain focus on nature and biodiversity. The LEAP approach is a great place to start and will help firms from every sector identify and understand their nature-related risks.
As with most ESG related topics, metrics may be the biggest challenge, and it will be tricky to find meaningful measures for target setting, reporting, MI and the disclosure itself. Focusing on this area of the framework first could establish a strong basis for long-term success.
For more insight and guidance, contact Irina Velkova.
