Monica Filkova discusses the scope and activity of the Taskforce on Nature-related Financial Disclosures
An oft-cited statistic is that half of the world’s GDP is moderately or highly dependent on nature. That’s the measured figure. However, nature plays a much more profound role – we rely on it for the air we breathe, the water we drink, the food we eat, the clothes we wear, the climate we live in and the green spaces we enjoy.
The Dasgupta review highlighted the steep decline of natural capital as a result of humans using resources at an unsustainable rate, without giving nature the time and space to replenish. We’ve now crossed six of nine ‘planetary boundaries’: land system change (due to urbanisation and agriculture), biodiversity loss, climate change, biochemical flows (related to fertiliser use), novel entities (plastic pollution being a key issue) and green water (in plants and soils). In response to rising risks from deforestation, increasing water stress and biodiversity loss, a growing number of companies and financial institutions are starting to assess nature.
The Taskforce on Nature-related Financial Disclosures (TNFD) was set up in 2021 with a mandate to develop a proposal for assessing and disclosing on nature.
TNFD’s scope is defined by reference to nature’s ‘four realms’ (Figure 1) and focuses primarily on living nature – ecosystem assets such as species and habitats associated with these realms. The assessment requirements cover drivers of nature change (ecosystem use, pollution, resource exploitation, invasive species and climate change) and our dependency on ecosystem services around provisioning (such as water and biomass), regulation (such as climate regulation, flood management and water filtration) and cultural significance (such as recreation).
It is worth noting that climate change and nature are interlinked and are both systemically important. There are overlaps, causal relationships and feedback loops within the climate-nature nexus. For instance, water stress can be caused by rising temperatures (climate change) and affect climate change through desertification. At the same time, it will impact the availability of water for consumption and production processes (dependency on nature) and affect resource use, given its scarcity and the reliance of local biodiversity on water supply (impact on nature). While climate is part of nature, the TNFD’s approach is to build on existing climate work and focus on aspects of nature that are less developed in terms of analytics and integration in enterprise and financing decision-making. For climate-related disclosures, TNFD will simply refer to the Taskforce on Climate-related Financial Disclosures (TCFD).
In March 2022, TNFD released its first beta version. It decided early on to follow an open innovation process, which foresees four beta releases before the taskforce publishes its recommendations and guidance (Figure 2, below). The consultation, which is ongoing until June 2023, is designed to solicit market feedback from scientific organisations, sustainability standard-setters and policy initiatives, companies and financial institutions on a global scale.
The first beta release introduced the proposed approach to disclosure. The draft recommendations intentionally follow the approach of TCFD – learning from work that has been done on climate to extend coverage to nature on a similar basis and facilitate incorporation into broader sustainability reporting standards and frameworks, but also to streamline the approach to assessment and disclosure for reporting entities. As with TCFD, TNFD is proposing disclosures across the four pillars of governance, strategy, risk management, and metrics and targets (Figure 3, below).
Work on disclosure metrics and targets is ongoing, and some of the thinking around impact and dependency metrics forms part of the second beta release in June 2022. Further releases will look into risks and opportunities, target-setting and other disclosure indicators.
In addition to the disclosure approach, TNFD is developing risk and opportunity assessment guidance called LEAP. The first version of the LEAP approach was released as part of the first beta version package in March 2022. It involves four core phases of analytic activity:
- Locate the entity’s interface with nature and, in the case of financial institutions’ portfolios, the footprint of interfaces across the investment/financed companies and assets
- Evaluate the entity’s dependencies and impacts on nature
- Assess the entity’s risks and opportunities related to nature
- Prepare to respond to nature-related risks and opportunities, and disclose to investors.
The core audiences for this first prototype of the LEAP approach are those who are responsible for preparing disclosures and financial reports and users of disclosures (such as investors, creditors and insurers), as well as risk management and operations teams. LEAP is designed to enable a wide range of financial institutions and corporates – whether they are publicly listed or privately held, multinational or small-to-medium-sized enterprises – to undertake a structured, step-wise and science-based assessment of nature-related risks and opportunities by developing an understanding of their nature-related dependencies and impacts on nature.
For financial institutions, the LEAP approach suggests that they should consider the nature of their business, the asset classes they manage and/or the financial products they offer, and how they and their products interact with nature. If it is feasible to perform a granular assessment of products and services, it may be possible to use a location-based assessment and aggregate to portfolio level. Otherwise, LEAP suggests that financial institutions adopt a sector or thematic-based approach to assess nature-related risks and opportunities, given the sectors and geographies of their exposures. In any event, stakeholder engagement is a key element in improving understanding, data collection and assessment. More information on the LEAP approach is available on the TNFD website at bit.ly/LEAPapproach
TNFD pilot testing by companies and financial institutions, which commenced in June 2022, will inform further iterations of the application guidance, helping to make it as practical and implementable as possible. It is only by working collaboratively across the entire finance sector that we will be able to tackle a problem of this scale.
References and resources
The World Economic Forum and PwC. Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy. 2020.
Dasgupta P. The Economics of Biodiversity: The Dasgupta Review. 2021.
Petro Kotzé. ‘Freshwater planetary boundary “considerably” transgressed: New research’. Mongabay 27 April 2022.
