In March 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) released the final draft of its framework for nature-related risk management and disclosure. Here, we look at why biodiversity is becoming an increasingly material topic and what companies should do in preparation for the publication of the final TNFD recommendations in September 2023.
Growing Momentum for Nature
Over the past year, global conferences such as COP27 and COP15 have underscored the interconnections between climate change and ecosystems, fuelling the growing attention to biodiversity issues such as habitat loss and overexploitation. In December 2022, 195 governments signed the Kunming-Montreal Global Biodiversity Framework (GBF) and committed to a vision of living in harmony with nature by 2050 and sustaining ecosystem services for the benefit of all people.
Nature-related issues have found their way into the capital markets as evidenced by the emergence of investor and disclosure-related initiatives. These include the TNFD, Nature Action 100+, and the International Sustainability Standards Board (ISSB)’s announcement that it will research incremental enhancements, including those related to natural ecosystems, to complement the recently published S2 Climate-related Disclosures.
Corporations have also started acting in this space through commitments on, for instance, habitat protection and limiting deforestation. S&P Global’s 2021 Corporate Sustainability Assessment (CSA) finds that electric utilities have made the most commitments on biodiversity, followed by construction materials and aluminum companies.
In a post-COP15 environment with heightened focus on biodiversity, capital market participants, particularly institutional investors, are increasingly interested in evaluating how portfolios are exposed to nature-related risks and opportunities. The TNFD is developing a framework to help with this objective.
The TNFD Framework
The TNFD is developing a global risk management and disclosure framework to enable organizations to identify, evaluate, manage, and report on nature-related risks and opportunities. The framework draws upon and provides input to existing frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and ISSB standards. The beta version (v0.4) released in March 2023 includes the following key components (see Figure 1):
Core Concepts & Definitions: The TNFD defines the foundational concepts of nature-related dependencies, impacts, risks, and opportunities (known collectively as nature-related issues).
The Risk & Opportunity Assessment Approach (LEAP): Voluntary guidance that enables companies and investors to assess and manage nature-related issues in four phases: Locate, Evaluate, Assess and Prepare (LEAP).
Disclosure Recommendations: 14 recommended disclosures (see Figure 2) that are aligned to the TCFD recommendations are introduced, as well as new general requirements and considerations on nature-related value chains, scenario analysis, and stakeholder engagement.
Disclosure metrics for nature-related issues that are sector-specific and universally applicable across all sectors.
Practical tools, guidance and templates for nature-related scenario analysis, and additional guidance (in the form of draft disclosure metrics and LEAP guidance) for specific sectors (financial institutions, agriculture and food, mining and metals, and energy) and biomes(the tropical forests, rivers and streams, marine shelf, and intensive land use systems).
Looking ahead to the release of the final TNFD recommendations (v1.0) in September 2023, here are three key steps companies can take to better identify the impact of their operations on nature:
Start Exploring the Draft TNFD Framework – Institutional investors want to gauge how exposed their portfolios are to nature-related risks. In addition to engagement on this topic, investors will seek to obtain transparent disclosure from issuers on biodiversity. As mentioned above, the TNFD aims to provide a framework to do this and appears likely to emerge as the investor-preferred framework for nature-related disclosure. Companies should begin exploring v0.4 of the TNFD, which provides a comprehensive preview of the final recommendations, and familiarize themselves with key requirements.
Determine Exposure to Biodiversity Risks – As with other ESG-related issues, companies will need to determine if nature-related issues are material to their organization. Particularly at-risk would be companies in the agriculture, forestry, fisheries, livestock, and extractives sectors that depend upon but also impact ecosystem services through their operations. Companies should look to industry-based SASB standards to determine if biodiversity issues are material and consult TNFD’s LEAP Framework for further guidance.
Keep Abreast of Biodiversity-related Initiatives – As noted above, there has been an increase in investor focus, including the emergence of high-profile investor collaborations in this space to facilitate stewardship activities and help providers of capital assess portfolio risk. Issuers should monitor initiatives gaining traction such as the Nature Action 100+ to begin to develop an understanding of investor expectations in this area.
This momentum around biodiversity and the TNFD is significant. If the TNFD follows the trajectory of similar voluntary reporting initiatives, such as the TCFD, we can expect a rapid evolution of the landscape, including increasing pressure from capital markets participants to adopt the TNFD and a mainstreaming of biodiversity-related reporting. But for now, the stage is set for the TNFD to unveil its much-awaited final recommendations in the fall.
 Refers to the various living organisms, including humans, and their interactions with each other and their natural surroundings.
 Signifies the diversity of ecosystems and the diversity within ecosystems of species and between species.
 Denotes the benefits (goods and services) that humans obtain from nature such as the provision of freshwater, timber from a forest and tourism from coral reefs.
 The SBTN builds on the momentum of the Science Based Targets initiative (SBTi). It is a network of 45+ organizations (including the same organizations behind the SBTi) developing methods and resources for science-based targets (SBTs) for nature for companies.
 Refers to global scale zones such as tundra and savannas that are characterized by their plant-life and average temperature and rainfall patterns.