What a Task Force on Nature-related Financial Disclosures will achieve
Global Canopy’s Nicky Chambers explains the new initiative
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The finance sector is coming together to apply its collective commercial muscle to tackling the nature crisis. After gathering momentum for months, the initiative to bring together a Task Force on Nature-related Financial Disclosures (TNFD) publicly launched on Friday. 34 financial institutions from across five continents have joined forces with the governments of UK, France, Peru and Switzerland, as well as financial regulators from Argentina and Mexico in an Informal Working Group. The group, which has 62 members in total, including the World Bank, the OECD and a number of multinational companies, will bring together a TNFD next year.
Rising awareness of nature-related financial risks
The huge interest in a TNFD highlights a growing recognition that the financial world is not separate from the natural world. A new report from Global Canopy and Vivid Economics, released last week, details how by investing in, lending to or insuring companies that depend or impact on nature, financial institutions are exposed to physical risks, transition risks and systemic risks. An increasing number of financial institutions have taken individual action on nature. Now, the TNFD creates the space for a unified global response.
The ongoing COVID-19 pandemic is a particularly glaring example of a nature-related risk. The destruction of natural habitats increases the chances of a new virus jumping from animals to humans, as the wild animals, which carry viruses humans have previously not been exposed to, are forced to live in closer proximity to humans.
Tackling the nature and climate crises in tandem
Nature-related financial risks are rising. A few weeks ago, the latest Global Biodiversity Outlook from the UN announced that none of the 20 biodiversity targets the world set for itself a decade ago will be fully met by the 2020 deadline. To avoid risks spiralling out of control, immediate action is needed. Finance sector leadership is the key to unlocking progress at scale. The size of the prize is vast: by 2030, nature-positive solutions could create $10trn in business opportunities and 395 million new jobs, according to the World Economic Forum.
As the finance sector now seeks to take action on nature-related risks, we can build on what has worked for climate. Over the last five years, the Task Force on Climate-related Financial Disclosures (TCFD), led by Mark Carney and Michael Bloomberg, has been instrumental in mainstreaming the issue of climate risk, while also improving access to the data financial institutions need to manage that risk. The TNFD aims to do the same for nature-related risks.
Improving reporting, metrics and data
Data is the foundation for risk management. Without data, financial institutions – and regulators – are running blind. To assess nature-related risks, we need to close data gaps. Tools - like ENCORE - can provide high-level estimates of risk-exposure, but for financial institutions to gain a more complete picture of their risks, they need more granular data to systematically determine risks at the company and asset level across their portfolios. With limited company disclosure on their impacts and dependencies on nature, financial institutions struggle to assess risks. Financial institutions need standardised metrics that allow them to compare nature risk across companies. Crucially, they also need forward-looking scenarios, so that they can analyse how companies will be exposed if ecosystems degrade further or if nature-related policies change. At the moment, scenario analysis is largely non-existent for nature.
By developing an international reporting standard, the TNFD will cater to the nature-related reporting, metrics and data needs of financial institutions. In its first year, the TNFD aims to build an initial draft framework, which is then planned to be tested and refined in year two, leading to a final launch and dissemination in year three.
Enabling action beyond disclosure
Standardised disclosure of nature-related risks can drive shifts in investment policies and practices. But disclosure alone will not get us to nature-positive investments at the required speed.
The TNFD will be only one component of the finance sector’s response to the nature crisis. Financial institutions should set targets and change their strategies and policies, as leading players have already done. For example, ASN Bank has declared they will have a positive effect on biodiversity by 2030, while Storebrand aims to have an investment portfolio that does not contribute to deforestation by 2025. Governments also need to put in place legally binding nature targets – and the policies, plans and regulations that will ensure they deliver on those goals. Financial regulators must develop nature-related regulations.
A complete finance sector response will require a multitude of responses and initiatives. A TNFD is one of them, and the process of bringing together the TNFD will help catalyse broader action by connecting key stakeholders with each other.
The Case for a Task Force on Nature-related Financial Disclosures is published by Global Canopy and Vivid Economics.
Nicky Chambers is Programme and Impact Director for Global Canopy, a non-profit promoting a deforestation-free economy