Great expectations for the TNFD

The TNFD’s recommendations will be released this autumn, changing the way investors think about nature-related risk. Victoria Robson asks whether investors are ready to adopt the framework.

When the Taskforce on Nature-Related Financial Disclosures unveils its final recommendations in September, it will conclude an 18-month-long consultation process that has encompassed four draft versions, interaction with a 1,100-strong forum of institutions and stakeholders, and input from a number of geographically-defined consultation groups. The framework has been pilot-tested by around 130 entities, including 72 financial institutions. The window for final feedback closed in June.

For global long-term investors with exposure across sectors and portfolios “there’s nowhere to hide from nature-related risk”, says Tony Goldner, the TNFD’s executive director. “These investors can’t diversify their risk because they are exposed to everything everywhere. They’re very focused on this issue now.”

Expectations for the TNFD are high. The framework shares the same pedigree as the Taskforce on Climate-Related Financial Disclosures (TCFD), which has been instrumental in positioning greenhouse gas emissions on corporate, government and stakeholder agendas globally.

“We hope the TNFD will play a similar role as the TCFD plays in climate-related disclosures by establishing a global framework through which to price in biodiversity risk and opportunity,” says Lucian Peppelenbos, climate and biodiversity strategist at Robeco. “That’s fundamentally what needs to happen.”

“There’s been a huge amount of investor engagement in the TNFD consultation process,” says Rupesh Madlani, senior adviser at NatureFinance, one of the TNFD’s 18 knowledge partners, which also include the Global Reporting Initiative and the International Sustainability Standards Board. “That’s partly because the TCFD established a climate track [for disclosure] that investors know well.”

Are investors ready?

The TNFD borrows heavily from its predecessor. It categorises physical, transition and systemic risks in the same way as the TCFD, retains the TCFD’s disclosure recommendation pillars (governance, strategy, risk management, and metrics and targets) and adopts its scope concept and scenario analysis model. But there is a key distinction: the TNFD’s risk and opportunity assessment approach, LEAP (Locate, Evaluate, Assess and Prepare).

“LEAP is the best framework we’ve got for thinking through nature-related issues – how does an institution understand its relationship with nature, what are its impacts and dependencies, and what are the risks and opportunities that flow from that?” says Thomas Maddox, global director of forests and land at CDP.

The environmental disclosure specialist is also a TNFD knowledge partner and is exploring aligning its existing questionnaires with the new framework. “If you report to CDP, you have a good head start on the TNFD process, but the TNFD framework is more comprehensive,” Maddox notes.

But, beyond those investors who are already engaged with the TNFD, institutions vary considerably in their preparedness to meet its recommendations.

“There are early innovators who are very keen to adopt nature-related reporting because it aligns with their investor base, stakeholders and companies in their portfolio,” says Madlani. “At the other end of the spectrum, investors exposed to less nature risk are waiting to see how [the framework] develops and what reporting solutions evolve to help them respond.”

Maddox says: “Some institutions will be up and running quickly, particularly those who’ve been most closely engaged with the development of the TNFD. But there are going to be teething issues at the beginning.”

The newness of the topic is itself a major headache for many investors. While there is growing awareness of biodiversity and nature-related risks among investors and companies, there is fatigue at having to get to grips with yet another disclosure subject. “As an investor, you’ve just about got your head around climate, and now you’re being asked, what about nature? It’s an extra mile for investors to go,” says Madlani.

Currently, corporate disclosure around impacts on nature is minimal. According to a Nature Benchmark survey conducted last year of around 400 ‘influential’ companies across eight industries, only 5 percent have carried out a science-based assessment of their nature and biodiversity impacts. A meagre 3 percent have committed to a nature positive trajectory by 2030.

The introduction of the EU’s Corporate Sustainability Reporting Directive will “usefully complement current standards, provided all of them are consistently articulated”, says Virginie Derue, head of ESG research at AXA IM. However, the CSRD does not require the first set of companies to report until 2025 at the earliest.

Disclosure dilemmas

Goldner acknowledges that collecting the required data will be difficult. Not just investors and companies, but governments too, have raised their data concerns with the taskforce, he says. In response, the TNFD conducted a data gap analysis last year. Its conclusion: “There’s not a lack of data. There are data consistency and accessibility issues,” he says.

And then there is the task of addressing global variations in approach. “One of the challenges is trying to develop standardised definitions and methodologies for measuring the state of nature and doing it consistently around the world,” Goldner adds.

Following its study, the TNFD launched the Nature-Related Data Catalyst, which brings together more than 100 data providers to explore the challenges. It is also developing the idea of a nature public data utility, similar to the Net-Zero Public Data Utility. “And we’re starting to see a huge amount of innovation on the data and the analytics side,” Goldner notes.

“Most importantly the framework recognises that nature-related disclosures will be new to many organisations,” says Derue. “Starting with a limited scope, focusing on specific activities or priority locations that are the most material, is a prudent but relevant approach.”

In any case, the absence of ideal data sets should not stop institutions from starting to report, says Maddox. “I don’t see data as the key bottleneck. Institutions can still do something even though it’s not going to be perfect, even though they might be using proxy data to begin with.”

Clear direction of travel

There is a sense of inevitability among investors and market practitioners that institutions and business will have no choice but to report their nature-related risks, impacts and dependencies. The business, legislative and reputational risks of not measuring the impact of nature loss on operations will become real if not addressed, says Madlani.

“I haven’t seen anyone make a strong argument as to why any company isn’t dependent on nature in some form,” he says. He expects reporting nature-related risks to become a regulatory and stock exchange requirement. And when it does, institutions that haven’t built a reporting capacity “will be behind the curve”, he adds.

“The longer a company waits, says the data is not available, it’s not quite clear what we should be doing or what framework to use, it’s going to get more expensive [to catch up],” says Maddox. Looking forward, “companies that have jumped in and are starting to do something are going to be best positioned”.

The launch last December of the Global Biodiversity Framework at COP15, “is a clear signal of what’s to come”, says Maddox. Almost 200 nations signed up the GBF’s 23 targets, of which Target 15 advocates for legal, administrative and policy measures to encourage businesses, including financial institutions, to monitor, assess and disclose their biodiversity risks, dependences and impacts.

While talk of the TNFD becoming mandatory might be premature, the release of the recommendations is expected, like the TCFD did for climate, to accelerate the global discussion around nature-related risks. “This is where the world is going. It’s where clients are going and science and legislation are headed,” says Peppelenbos. “With clients, biodiversity and nature are now just as much part of the conversation as climate.”

For the TNFD, following the publications of its recommendations, Goldner says the taskforce hopes to see companies get started. To help them, the TNFD has developed additional guidance to be launched in conjunction with the recommendations. “We recognise this is difficult, we recognise there are data challenges,” he says.

Going forward, “we hope to see increasing disclosure ambition over time as confidence and capabilities build, no doubt driven by the growing information demands and needs of investors”, Goldner says.

Although it might take some time – the TCFD issued its recommendations five years ago – Peppelenbos expects the market response to the TNFD to be as strong as to its predecessor. “It will take a number of years for sector guidance, thresholds, and transition models to develop for nature-related risks, but I would expect TNFD adoption to match TCFD’s.”

Data developments

Having adopted the Science Based Targets Network’s (SBTN) definitions of impacts and dependencies on nature, the TNFD recommends that institutions use SBTN methods to set targets and measure performance.

However, collecting the necessary data is no easy task. Unlike reporting a global carbon footprint captured by a single emissions metric, nature-related data is highly local, specific and diverse. Data on nature also remains heavily reliant on models, proxies and assumptions.

“The lack of reported and granular location-specific data is a major challenge, which translates into disclosure challenges at both aggregate and detailed levels,” says Virginie Derue, head of ESG research at AXA IM. “More broadly, challenges also stem from the low level of maturity of the thematic, meaning that corporates will probably struggle defining most material topics and priorities.”

A further issue is the absence of established thresholds to benchmark progress. With climate-related disclosure, investors and their portfolio businesses can work toward net-zero targets. “Where are the science or policy-based biodiversity and nature thresholds that we can apply to assess individual companies?” asks Robeco’s Lucian Peppelenbos.

“To measure the impact on nature of a single company and its supply chain is incredibly complex, but that is what the TNFD is asking for. We hope that the science develops and the data improves.”