TNFD Releases First Ever Nature-Related Risk Framework
On March 15, 2022, the Taskforce on Nature-related Financial Disclosures (“TNFD”) released the first version of its nature-related risk-management and disclosure framework (the “TNFD Framework”). The purpose of the TNFD Framework is to allow corporations and financial institutions of all sizes to report and act on evolving nature-related risks and opportunities, with the stated aim of supporting “a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.”
The TNFD Framework seeks to tackle the risk of nature-loss to the global economy in much the same way as the Task Force on Climate-Related Financial Disclosures (“TCFD”) has done for climate risks. It is the first framework designed to integrate nature-related risk and opportunity analysis into corporate decision-making. Importantly, TNFD defines nature-related risks to include risks arising from organizations’ impacts on nature as well as their dependencies on nature.
What is the TNFD?
The TNFD is an international “market-led, science-based and government-endorsed” initiative funded by, among others, the United Nations Development Programme, the governments of the United Kingdom, Switzerland, the Netherlands, and Australia, and the Global Environment Facility (the “GEF”). Canada is a donor and member of the GEF, with two federal representatives on the GEF Council. The TNFD has also received political and institutional support through its endorsement by the G7 Finance Ministers and the Network for Greening the Financial System.
Described as an “alliance”, the TNFD is a group of 34 Taskforce Members who are backed by 350 institutional supporters – named the TNFD Forum – to which the Government of Canada is a part, and informed by experts in the areas of biodiversity, natural capital, market standards and reporting practice, called the TNFD Knowledge Hub. The TNFD Taskforce is led by two co-chairs, including the current Executive Secretary of the United Nations Convention on Biological Diversity.
The Taskforce Members represent institutions with significant market capitalization, totalling over US$3.1 trillion, and manage assets exceeding US$18.3 trillion. The TNFD’s global network spans 180 countries. Given TNFD Membership’s strong position in the capital markets, there may be significant support for the use of the TNFD Framework, despite its voluntary nature.
What is the Rationale behind the TNFD’s Framework?
The functioning of TNFD’s Framework is two-fold: 1) to more accurately determine nature related risks, and 2) to promote investment opportunities that are more likely to have nature-positive outcomes. TNFD observed an urgent need to develop such a framework given the dependency of the economy and society on nature.
The TNFD estimates that US$44 trillion of the world’s economic output is dependent on nature, either to a moderate or high degree. Adverse impacts to nature have negative consequences for supply chains and corporate operations and business disruption risk translates to risk for investors and lenders of those businesses. As a result, inadequately accounting for nature-related risks is arguably detrimental to investors, lenders, and corporations alike.
The nature-related dependencies of the economy create financial risk, but they can also give rise to opportunities. According to the Taskforce, actions to address and manage these issues through corporate “governance, strategy, risk management” may provide financial opportunities and contribute to the sustainability of the business.
The Seven Principles Guiding the TNFD’s Development of the TNFD Framework
The TNFD’s work is guided by the following seven principles:
- Market Usability: Develop frameworks directly usable and valuable to market reporters and users, notably corporations and financial institutions, as well as policy and other actors.
- Science-based: Follow a scientifically anchored approach, incorporate well established and emerging scientific evidence and converge towards other existing science-based initiatives.
- Nature-related Risks: Embrace nature-related risks that include immediate, material financial risks as well as nature dependencies and impacts and related organisational and societal risks.
- Purpose-driven: Be purpose driven and actively target reducing risks and increasing nature-positive action by using the minimum required level of granularity to ensure achievement of the TNFD goal.
- Integrated & Adaptive: Build effective measurement and reporting frameworks that can be integrated into and enhance existing disclosures and other standards. Account for and be adaptive to changes in national and international policy commitments, standards and market conditions.
- Climate-Nature Nexus: Employ an integrated approach to climate- and nature-related risks, scaling up finance for nature-based solutions.
- Globally Inclusive: Ensure the Framework and approach is relevant, just, valuable, accessible and affordable worldwide, including emerging and developed markets.
An Overview of the TNFD Framework
The first beta version of the TNFD Framework consists of three core components:
- Fundamentals - Science-based concepts and definitions for companies to understand nature and nature-related risks and opportunities and to use when assessing and disclosing their nature-related risks and opportunities;
- Disclosure - Recommendations for nature-related disclosures which largely aligned with the four main pillars of the TCFD Framework.; and
- Guidance – Practical guidance for companies and financial institutions to incorporate nature-related risk and opportunity assessment into their enterprise strategy and risk management processes to inform a range of corporate and capital allocation decisions, including those related to reporting and disclosure.
The first beta version provides a glimpse into what the final framework might look like, though it may be subject to extensive revision as three more beta drafts are set to be released before the final TNFD recommendations. Each core component is discussed in greater detail below.
I. Fundamentals for understanding nature
The TNFD recognized the necessity of identifying key terminology that can be consistently used across sectors to assess nature and nature-related risks when making corporate and investment decisions, not unlike the pre-existing climate terminology. Leading scientists and conservation organizations around the world participated in the development and review of the definitions, while the TNFD also worked to ensure that the definitions would be accessible in their intended sectors of use.
The definitions fall into 5 broad categories:
- Definitions of nature: nature, realm, natural capital, environmental assets, ecosystem, ecosystem assets, ecosystem services, biodiversity, biomes, freshwater, habitat, land, ocean, priority locations, and species.
- Definitions of dependencies: dependencies and dependency pathway.
- Definitions of impacts: impact, direct impacts, indirect impact, impact drivers, and impact pathways.
- Definitions of risks: nature loss, physical risks, transition risks, and systemic risks.
- Definitions of opportunities: nature-related opportunities, nature-positive, natural-climate solutions, and nature-based solutions.
The full definitions can be found in the glossary of key terms.
II. Disclosure Recommendations
The TNFD Framework provides a set of draft disclosure recommendations on nature-related risk and opportunities, which are intended to bolster transparency and provide markets with the necessary information to redirect capital from nature-negative outcomes.
The TNFD Framework sets out both the draft disclosure recommendations and general requirements that disclosers should adhere to. The four main pillars mirror the widely-used TCFD framework:
- Governance: the ways in which the organisation’s oversight and decision-making functions take nature-related risk and opportunities into account.
- Strategy: the integration of actual and potential effects of nature-related risks and opportunities on the organisation’s business model, strategy and financial planning.
- Risk management: how the organisation integrates nature-related risks into its overall risk management approach.
- Metrics and targets: quantitative and qualitative performance indicators and aims related to nature-related risk and opportunities, based on nature dependencies and impacts.
The following general requirements for the preparation of disclosures apply across each of the four pillars:
- Identification of material nature-related risks and opportunities should be based on an assessment of nature-related dependencies and nature impacts;
- Consideration of the organisation’s interface with nature at specific locations should be integral to the assessment, recognising that nature-related dependencies and nature impacts occur in specific ecosystems;
- Consideration should be given to how the organisation ensures that the correct skills and competencies are available to assess nature-related risks and opportunities, and oversee strategies designed to respond to those risks and opportunities; and,
- A statement should be provided regarding the scope of current disclosures and what further disclosures are planned in the future.
Further specific guidance will be developed for individual industry sectors.
III. Guidance on Nature-related Risk and Opportunity Assessment
The TNFD has developed a science-based assessment approach for nature-related risk and opportunity management called the LEAP process. The LEAP process stands for:
- L – Locate your interface with nature;
- E – Evaluate your dependencies and impacts;
- A – Assess your risks and opportunities; and
- P – Prepare to respond to nature-related risks and opportunities and report.
The LEAP approach is intended to be a helpful guide for corporations and financial institutions in their assessments of nature-related risks and opportunities. It will be further developed and refined to be applicable to a wider range of financial institutions in subsequent beta versions.
Who is the TNFD Framework Designed for?
The TNFD states that the TNFD Framework is designed for seven different users (along with the intended benefit for each user):
- Investors and Financial Institutions: Support more informed and robust capital allocation decisions and active ownership strategies based on clarity, confidence and trust in data relating to nature-related risks and opportunities;
- Analysts: Enable high-quality and timely analysis that incorporates nature-related risks to support the determination of potential and likely impacts on future cash flow and company valuations;
- Corporations: Inform better corporate strategy, governance and risk management decision making, and the incorporation of nature-related risk assessments alongside, and ideally integrated with, climate-related risk reporting in statutory reporting to markets and regulators;
- Regulators: Ensure recommendations and guidance align with existing disclosure mechanisms, standards and other jurisdiction-specific regulatory requirements;
- Stock Exchanges: Support and encourage consideration of new voluntary and mandatory listing requirements linked to nature-related risks, as well as opportunities for new listed equity offerings that encourage nature-positive outcomes;
- Accounting Firms: Enable comprehensive company assurance that incorporates nature risk and opportunity considerations, and support internal risk functions; and
- ESG Data Providers, Credit Rating Agencies and Financial Data and Infrastructure Providers: Enable support to investors and financial decision makers with consistent and robust data and insights on how corporates manage their nature-related risks.
How does the TNFD Framework Fit into the ESG Disclosures Landscape?
While the TNFD Framework is the first nature-related risk assessment of its kind, the Taskforce recognized that market participants require a framework that is clear and consistent with the emerging global baseline for sustainability reporting. The TNFD helpfully designed the TNFD Framework to align with the recommendations of the TCFD. The harmony between the recommended disclosure of the TNFD and TCFD seeks to streamline disclosure and encourages integrated disclosures.
During the iterative framework development process, the Taskforce will work closely with standard setters, such as the ISSB, to “align the TNFD’s recommendations as closely as possible to the emerging global baseline for sustainability reporting.” This means that the Final Framework will be deferential to the forthcoming ISSB framework and will not create tensions or inconsistencies between the frameworks.
What comes next?
The TNFD is currently seeking feedback on the TNFD Framework from market participants and other stakeholders. In particular, the TNFD has identified a number of areas for further framework development: the interplay with climate (described as the “climate-nature nexus”), scenario development, scope of disclosures, social dimensions, sector-specific guidance, data and metrics, and defining “nature-positive.”
Feedback can be provided through the TNFD’s online platform, and interested parties are also encouraged to pilot the TNFD Framework independently or through industry-specific collaborative efforts outlined on the platform. The TNFD may convene focus groups in the future to further engage feedback provided by participants.
With the benefit of feedback, the TNFD plans to release subsequent versions of the TNFD Framework in June and October, 2022 and in February 2023. Final recommendations are planned for September 2023.
The Bottom Line
The TNFD Framework marks the latest noteworthy entrance into the environmental, social, and governance (“ESG”) disclosure landscape, which has seen significant developments both in Canada and internationally in recent months:
- In Canada, the public comment period for the Canadian Securities Administrators’ (“CSA”) proposed National Instrument 51-107 – Disclosure of Climate-Related Matters(“NI 51-107”) closed in February, through which the CSA received an unprecedented number of comment letters. Our review of NI 51-107 can be found here;
- In the United States, the Securities and Exchange Commission released its proposed climate-related disclosure rules, which we previously reported on here; and
- Globally, the International Sustainability Standards Board (the “ISSB”) has been established and, on March 31, released its proposals for a comprehensive global baseline of sustainability disclosures which we reported on here.
The TNFD Framework highlights the significance of nature-related financial risk and marks a novel development in nature-related risk assessment and market action. As a market-led initiative, adoption of and compliance with the TNFD Framework will be voluntary. However, the institutional and political support for the TNFD and the TNFD Framework may result in significant support for its adoption. As is increasingly the case with ESG disclosures generally, market pressure may turn out to be a primary driving force in the adoption of the ultimate TNFD Framework.
Although concerns may be raised with respect to the complexity of the reporting burden proposed by the TNFD Framework, its alignment with ISSB and TCFD standards are intended to streamline the process. As corporate disclosure practices continue to evolve into a “new normal” of increased transparency, those who do not proactively engage may eventually experience reduced access to capital.
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