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Our health, well-being and economies depend on nature. Global nature loss is not only a critical risk to the future health of society, but the performance of companies and investments. September marked the launch of the TNFD, the world’s latest tool to help private sector address the nature crisis. The TNFD is the culmination of two years of development through an open innovation process that engaged thousands of companies and experts from around the world.
The core message driving the TNFD is that our society, economies and financial systems are embedded in nature, not external to it. The TNFD defines nature as living organisms, their systems of interactions and their environments. For business, this means that nature is no longer a corporate social responsibility issue, but a core and strategic risk management issue.
TNFD in a nutshell
- The TNFD (Taskforce for Nature-related Financial Disclosures) is a new risk management and disclosure framework for organisations to report and act on nature-related risks. It shares many characteristics with the TCFD, a well-established climate framework.
- It provides sorely needed guidance for corporates to understand and disclose their interactions with nature. In turn, this enables banks and investors to redirect private financial flows towards companies displaying nature positive activities. This is essential for achieving the targets set out in the Global Biodiversity Framework (GBF). The Global Biodiversity framework is an international agreement negotiated in 2022 to mitigate the nature crisis.
- Businesses can use the TNFD method to understand their material impacts and dependencies on nature. The TNFD’s disclosures and metrics can be used by the financial sector to track the nature impacts and dependencies of their investments.
- The TCFD and TNFD are both voluntary frameworks with no legal obligation of companies to adopt. However, the framework can help companies with practical guidance to comply with some of the requirements of the CSRD (the EU’s sustainability reporting regulation).
- The TNFD impacts governance, strategy, risk management and reporting of companies and financial institutions. This means that management teams, boards of directors, investors and financiers should all get up to speed on the TNFD.
So, what are the 7 things that you need to know about the TNFD?
1. Better data means better decisions
Nature is complex and this complexity necessitates more and better data describing how companies impact and depend on nature. The TNFD enables companies and financial institutions to identify and transparently communicate appropriate nature disclosures and metrics.
A value chain is used to conceptualise a companies’ entire operations, comprising of upstream, downstream and direct operations. The TNFD allows companies and financial institutions to identify how their value chains interact with nature. This means the TNFD can help identify a range of nature impacts including from upstream sourced commodities, direct operations such as processing, downstream impacts such as product-use and waste.
Increased quantity and quality of nature data enables more transparent decision-making. Companies can identify and avoid their most harmful impacts, while the financial sector can divest from investments that exhibit excess nature risk.
2. Impacts and dependencies on nature create business risks and opportunities
The TNFD uses four key terms: impacts, dependencies, risks and opportunities. An organisation’s impacts and dependencies on nature result in risks and opportunities. The TNFD’s disclosure recommendation cover all four, as well as an organisation’s response to them.
The TNFD definitions are as follows:
- Impacts – on nature caused, or contributed to, by the organisation
- Dependencies – of the organisation on nature
- Risks – to the organisation stemming from their dependencies and impacts
- Opportunities – for the organisation that benefit nature through positive impacts or mitigation of negative impacts on nature
Importantly, the TNFD emphasises the financial effects of nature risks and opportunities. In effect this helps to show how changes in nature impact revenues, costs of capital, assets, and liabilities. Examples can include climate impacts on agricultural production, invasive species on biomass production or exploitation of aquatic resources.
3. The first steps for corporate nature action
The LEAP process is the TNFD’s method for companies to get serious on nature. It is a four stage, iterative process that allows users to Locate, Evaluate, Assess and Prepare their nature disclosures.
- Within the Locate phase, the TNFD helps users identify potential nature-related issues across three dimensions: sector, value chain and geography. In practice, this means that companies identify the material sources and physical locations of nature impacts, dependencies, risks and opportunities.
- The Evaluate phase involves the evaluation of impacts and dependencies that are associated with the locations identified in phase one. This involves trends and changes in natural capital associated with business activities.
- The TNFD provides a list that is used within the Assess phase to understand the risks and opportunities that arise from material impacts and dependencies. These risks and opportunities should be prioritised along with their associated physical locations.
- The Prepare phase is related to the preparing a response to the nature-related issues identified in first three phases of LEAP. This includes actions such as target setting and establishing appropriate disclosures to communicate the findings to external stakeholders.
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4. Next generation nature reporting for companies
The TNFD gives a glimpse to the next generation of corporate reporting on nature. Building on the TCFD’s established structure, the TNFD recommended disclosures are how the findings from the LEAP process are integrated into governance, business strategy, risk management and reported metrics.
Importantly the TNFD defines 14 core global metrics that can be used by companies to quantify their impacts and dependencies on nature. These metrics include land-use change, water consumption, pollution and are explicitly linked to drivers of nature change and the Global Biodiversity Framework targets.
5. The financial institutions of tomorrow
The TNFD’s recommendations are also applicable for financial institutions. The data and metrics that flow from companies will enable a new level of analysis on financial products and portfolios. Analysis that is now based on sector and geographic averages, will start to reflect the nature-related performance of each underlying investment.
Leading financial institutions can use this new data to provide future products that are aligned with a net positive impact. These can include funds that only hold companies with TNFD metrics below a certain level, or loans with margins that reflect a company’s direct impact on nature.
6. Regulators blueprint for nature
The TNFD is a voluntary framework, meaning that companies and financial institutions are under no obligation to adopt its recommendations. However, global regulators are expected to use the TNFD as the next generation of nature-related regulation is established.
The EU’s CSRD, a world-leading regulatory framework for the private sector reporting, used the TNFD as a key reference in the drafting process of Europe’s mandatory standards. This process can be expected to repeat in many jurisdictions around the world. Companies looking to stay ahead of the regulation curve may look to the TNFD to prepare.
7. How to get started?
The TNFD website contains all current guidance which is available freely to all, including guidance to get started. For companies in Europe already grappling with the CSRD, the TNFD likely provides valuable practical guidance on complying with the biodiversity and ecosystem reporting requirements.
The TNFD has also launched its adopters initiative, which aims to collect leading global companies and financial institutions that are stating their intention to adopt the recommended disclosures by 2024 or 2025. The TNFD will publish the names of adopters on their website in January 2024.
+1 How does the TNFD interact with the SBTN
The Science-based targets for Nature (SBTN) are a set of guidelines in development to help businesses set targets related to nature. The TNFD is compatible with the SBTN guidance, with the TNFD’s emphasis on risks and disclosures complementing the SBTN’s focus on target-setting.
The TNFD has released a guidance document on how the TNFD and SBTN complement each other. This means that companies already piloting the SBTN can use the TNFD to formulate their standardised disclosures.
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