Prototype framework released by taskforce on nature-related financial disclosures (TNFD)
1. Summary
On 15 March 2022, the Taskforce on Nature-related Financial Disclosures (TNFD) released a prototype for its nature-related risk-management and disclosure framework. The prototype includes three key components:
- (Fundamentals for understanding nature) a summary of definitions and fundamental concepts which the TNFD recommends organisations use when assessing and disclosing nature-related risks and opportunities;
- (TNFD disclosure recommendations) draft disclosure recommendations for nature-related risks and opportunities; and
- (Process for nature-related risk and opportunity assessment) guidance to assist organisations in undertaking nature-related risk and opportunity assessment.
The release of the prototype is the first step in a consultation and development process scheduled to last for 18 months, with the final recommendations to be released in the third quarter of 2023.
The prototype sets out to build on the approach taken by the Taskforce on Climate-related Financial Disclosures (TCFD), and align with the emerging global baseline for sustainability standards being developed by the recently established International Sustainability Standards Board.
The TCFD’s guidance has quickly become the global standard for climate-related risk disclosure, with 8 jurisdictions (the United Kingdom, Japan, Singapore, New Zealand, Hong Kong, the European Union, Brazil and Switzerland)[1] having incorporated the TCFD recommendations into their national reporting regimes (and the US Securities and Exchange Commission (SEC) recently proposing mandatory climate disclosures similar to those recommended by the TCFD). According to our analysis, 86% of ASX50 entities in 2021 either reported against, or disclosed that they were in the process of aligning their climate reporting to, the TCFD recommendations (with a further 8% saying they supported the TCFD recommendations and were considering plans to align disclosures with the TCFD recommendations).
The prototype encourages organisations to work towards integrated climate and nature-related disclosures in their financial reporting.
2. Background
The TNFD was formally launched in June 2021. The initiative has been endorsed by the G7 Finance Ministers and the G20 Sustainable Finance Roadmap, and received widespread support from financial institutions, corporates and governments. It receives funding from governments (including the Australian government), the UN and philanthropic foundations. Its members represent institutions with a combined market capitalisation of over US$3.1 trillion, with over US$18.3 trillion in assets under management, and a footprint in over 180 countries.
The prototype highlights that more than half of the world’s economic output (an estimated US$44 trillion) is highly or moderately dependent on nature. It says that as the size and frequency of nature-related losses, and related impacts on economies and societies, is becoming clearer, so too is understanding that nature-related risk is as great a challenge as climate risk.
3. Fundamentals for understanding nature
The prototype defines nature-related risks as the potential threats posed to organisations linked to their and other organisations’ dependencies on nature and nature impacts. Nature is defined as a construct of four realms – land, ocean, freshwater and atmosphere.
Nature-related risks, according to the prototype, can derive from physical risks (eg due to extreme weather, seismic events or changes in soil quality or ocean chemistry), transition risks (eg government regulations or policy,[2] technological developments, market changes and litigation aimed at halting or reversing the damage to nature) and systemic risks (eg the loss of a key species).
The prototype defines nature-related opportunities as activities that create positive outcomes for organisations and nature by avoiding or reducing impact on nature (eg resource efficiency) or contributing to its restoration (eg natural climate solutions).
4. Draft disclosure recommendations
4.1 Location and scope
Like the TCFD, the TNFD prototype recommends that material nature-related information is provided in public annual financial filings.
The prototype provides that the TNFD expects organisations to disclose the “full set” of material risks and opportunities, including those related to the impacts and dependencies of their upstream and downstream value chains.
4.2 Draft disclosure recommendations
The draft disclosure recommendations in the prototype build on, and integrate with, the TCFD’s disclosure recommendations. They follow the same four pillars as the TCFD recommendations: governance, strategy, risk management and metrics and targets.
Consistent with the structure of the TCFD recommendations, under the TNFD draft recommendations sit a series of recommended disclosures, and guidance to assist organisations to address those recommended disclosures.
5. Process for nature-related risk and opportunity assessment
To help organisations incorporate nature considerations into enterprise and portfolio risk management processes, the prototype includes an integrated nature-related risk and opportunity assessment process, called LEAP.
The LEAP approach is directed at financial report preparers and users, as well as risk management and operations teams.
The TNFD has also developed an “extended” LEAP approach for financial institutions – called LEAP-FI – which focuses on the assessment of nature-related risks and opportunities in relation to financed activities.
6. What’s next
The prototype flags that further work is underway by the TNFD in relation to certain areas, including:
a. the links to, and complex interplay with, climate – termed the ‘climate-nature nexus’;
b. scenario development, acknowledging there are currently no standard scenarios designed to address the resilience of organisations to nature-related risks;
c. the scope of disclosures – the TCFD recommendations cover scope 1, 2 and 3 greenhouse gas emissions, as defined by the GHG protocol; an equivalent for nature does not yet exist;
d. approach to materiality;
e. social dimensions;
f. defining ‘nature-positive’, acknowledging this is the subject of ongoing discussions linked to the agreement of the Convention on Biological Diversity’s Post-2020 Global Biodiversity Framework (which will provide the overarching global policy framework agreed by governments) (CBD Global Biodiversity Framework);
g. data and metrics, acknowledging key challenges include gaps in available data, varying data quality and consistency, and the need to identify a set of essential metrics for nature-related risk and opportunity management and disclosure; and
h. sector-specific guidance.
References
[1] TCFD 2021 Status Report.
[2] For example, in line with the Convention on Biological Diversity (CBD) Post-2020 Global Biodiversity Framework.
