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Part I: Your guide to the Taskforce on Nature-related Financial Disclosures

Part I: Your guide to the Taskforce on Nature-related Financial Disclosures

Prasad Gollakota

20 years: Capital markets & banking

Understand the importance of the TNFD and how it differs from other sustainability disclosure and reporting initiatives

Part I: Your guide to the Taskforce on Nature-related Financial Disclosures

At the heart of the challenge of transitioning to a low-carbon economy lies an unaddressed market failure: we have not been paying for negative externalities related to the environment. The failure to price the resources we use has undermined the long-term sustainability of the global economy and the environment. When corporations fail to bear the costs associated with their environmental impacts, they have little incentive to reduce emissions, protect biodiversity, or invest in sustainable practices.

The result has been over-consumption of natural resources, pollution, and habitat destruction, resulting in loss of biodiversity – and exacerbating climate change. The failure to internalize these costs distorts market signals, perpetuates environmental degradation, and poses significant risks to ecosystems, human health and future generations.

Yet in the years ahead, this dismal cycle could be disrupted as businesses and investors gain greater access to reliable and evidence-based information through the development of corporate reporting on nature. The framework developed by the Taskforce on Nature-related Financial Disclosures (TNFD) will be central to that effort.

Nature in crisis

The global situation is dire. Just look at global wildlife populations: according to the World Wide Fund for Nature (WWF), they have plummeted by 69% since 1970. The rich biodiversity that sustains our planet is in crisis, putting every species at risk – including us.

Climate and biodiversity are inextricably linked. According to the UN, warming of 1.5 degrees Celsius will result in 4% of mammals losing half their habitat. At 2 C, 8% of mammals will lose half their habitat, and at 3 C, a shocking 41% of mammals will lose half their habitat. And this is just above ground. Below the ocean surface, things will be even worse. In the past 150 years, live coral reefs have already halved due to current warming levels. However, at 1.5 C, it is expected that 70-90% of coral reefs will have vanished; at 2 C we’ll reach a point of no return, with 99% of coral reefs expected to have vanished. If they go, over 1 million species that rely on them will disappear.

But it’s not all bad news. Biodiversity is not just a victim of climate change, it’s also part of the solution. Biodiversity contributes significantly to the Earth’s capacity to sequester carbon: by protecting and enhancing biodiversity we can develop a practical and effective strategy for combating climate change. Indeed, science has identified several significant carbon sequesters beyond trees. Recent studies suggest that the oceans are the real lungs of the planet. Phytoplankton – microscopic organisms – capture enormous quantities of carbon dioxide, at a level equivalent to four Amazon forests. Closer to shore, seagrasses, salt marshes, mangroves and kelp also serve as significant carbon sinks.

Global support to protect biodiversity was cemented in 2022, when an agreement known as the Kunming-Montreal Global Biodiversity Framework was established. It committed 196 nations to stopping and reversing nature loss by 2030 – a goal that may be operationalized by business adoption of the TNFD framework in the coming years.

healthy coral reef

TNFD: a welcome step forward

Announced in 2020, the TNFD is a science-based and government-backed global initiative that focuses on how to address organizations’ reliance on nature. Its final recommendations, published in September 2023, offer a risk management and disclosure framework to help companies and governments understand their nature-related dependencies, impacts, risks and opportunities. It is intended to support a shift in financial flows away from nature-negative outcomes towards nature-positive outcomes. The TNFD Framework is built around the same four pillars previously developed by the Task Force on Climate-Related Financial Disclosures (TCFD), so the structure will be familiar to many.

Governance

To address the lack of formal governance around nature-related issues, organizations can start by integrating these concerns into role descriptions for sustainability officers and directors. Board upskilling is crucial. Organizations should provide internal briefings, engage in dialogue with relevant teams and consult external experts to integrate nature-related issues into decision-making. They should also consider stakeholder engagement, particularly with indigenous peoples, local communities and other affected stakeholders, to understand their concerns and priorities.

Strategy

Organizations should identify potentially nature-related issues in their operations and value chains using TNFD’s suggested ‘Leap’ approach. This comprises four steps: locate your interface with nature; evaluate dependencies and impacts; assess material risks and opportunities; and prepare to respond and report. Utilizing multiple datasets builds comprehensive understanding, while adjusting materiality thresholds ensures manageable analysis. Defining short-, medium-, and long-term time horizons, aligned with organizational incentives and broader policy goals like the Global Biodiversity Framework, is crucial. Lastly, organizations should assess the strategic implications of findings on their business model, value chain and financial planning.

Risk and impact management

Organizations should assess their risks and manage their impact through methods including scenario analysis, identifying relevant approaches and understanding their limitations. Heat mapping, akin to climate risk assessment, can also be useful, especially for financial institutions. For scenario analysis, begin iteratively, focusing initially on specific business units or regions; use the Leap approach and the TNFD Tools Catalogue. Next, identify and adjust risk-management processes and organizational structures to address nature-related issues. This includes reviewing risk processes, organizational structures, roles, responsibilities and tools.

Metrics and targets

To initiate nature-related disclosure metrics, organizations should grasp TNFD’s core and additional metrics, expanding over time to include forward-looking indicators. For effective target-setting, adopt the methods of the Science Based Targets Network (SBTN). Start by setting targets for material impact drivers relevant to organizational activities. Consider how to monitor and assess progress and potential interactions with climate-related targets. Overall, organizations must progressively integrate nature-related metrics and targets into their reporting and management practices to address biodiversity loss and nature degradation effectively.

fern

What makes TNFD different?

There are several sustainability reporting initiatives aiming to enhance disclosure and transparency: they include the Global Reporting Initiative (GRI), the CDP (formerly the Carbon Disclosure Project), and the International Sustainability Standards Board (ISSB) to name a few. Each have nuances that leaders need to understand before committing to a specific approach.

The GRI is broader than the TNFD. It offers a range of standards covering a wide range of ESG topics, including environmental issues, labor practices, human rights and ethics. It allows organizations to communicate their impact on critical sustainability issues to a variety of stakeholders, not just investors.

The CDP, on the other hand, narrows the focus primarily to environmental aspects, especially carbon emissions, water security and deforestation. It provides a platform for disclosing environmental impacts, with a data-driven approach that facilitates targeted insights into specific areas of environmental concern.

Finally, the ISSB aims to streamline global sustainability reporting, developing standards focusing on material sustainability-related information necessary for investors. While the ISSB covers a broad range of sustainability issues, its approach is centered on financial materiality. The ISSB also recently assumed responsibility for monitoring the progress of companies’ climate-related disclosures, taking over from the now-disbanded TCFD.

This piece is part one of an article that was originally published in Dialogue on 21 May 2024. Stay tuned for part two on Sustainability Unlocked.

Prasad Gollakota
About the author

Prasad Gollakota

Prasad has spent 20 years working in financial services, where he spent the majority of his time at UBS, with his last role there being Managing Director within the combined Debt and Equity capital markets business. Before joining xUnlocked, Prasad worked at an Infrastructure and Renewables advisory business, where he delivered projects such as financing the largest operational solar farm in Australia. Prasad is Chief Content Officer at xUnlocked, a B Corp best known for its flagship learning platform 'Sustainability Unlocked', serving global clients that include Santander, Airbus and the London Stock Exchange.

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