The Taskforce on Nature-related Financial Disclosures (TNFD) has published a proposed approach to nature-related scenario analysis developed in collaboration with a range of “knowledge partners”, including the Network for Greening the Financial System (NGFS).
Launched in June 2021, the TNFD has until 2023 to develop a risk management and disclosure framework for organisations to report and act on evolving nature-related risks.
Friday’s document – published to coincide with the initiative releasing version 0.3 of its beta framework – noted that scenario analysis can support corporates and financial institutions to assess nature-related risks and opportunities in the face of complex uncertainties.
“It plays an important role in informing corporate strategy, risk management and capital allocation decisions that are as robust and resilient as possible to a number of plausible futures. It can thereby improve both decision-making and disclosure of nature-related risks and opportunities.”
In its proposal, the TNFD says its approach to scenarios is framed around two critical uncertainties that can be tailored “to maximise the relevance and decision-utility to the organisation”.
The first is nature loss and the ability of the company to adapt, while the second is the alignment of market and non-market driving forces. These roughly correlate with the physical and transition risks associated with climate change, respectively.
Another key design characteristic in TNFD’s initial proposal touches on the use of “qualitative scenario storylines”, although the report notes that some targeted quantification can be undertaken and layered into this approach to interrogate further issues that emerge.
Looking ahead, the TNFD will use the paper as the basis for a set of pilot tests, focusing initially on use by corporates to improve decision-making. It is also working to adapt and develop the approach to scenarios for financial institutions.
TNFD will continue to collaborate closely with the NGFS Nature Taskforce and their conceptual framework and approach to scenario analysis, which is currently in development.
Launched in March, the Taskforce has a two-year mandate to mainstream the consideration of nature-related risks across the initiative’s various streams of work.
Kate Fowler, manager of policy and advocacy at Federated Hermes, told Responsible Investor that TNFD’s new framework is a “positive start” to addressing scenario analysis and target-setting for nature, and welcomed the move to reduce fragmentation by referencing other initiatives such as the Science Based Targets Network and NGFS.
“The recognition of the need for an integrated approach that covers climate and nature is also very welcome,” she said.
Another important addition since TNFD released version 0.2 in June are proposed new disclosure recommendations related to supply chain traceability, the quality of stakeholders’ – including rights-holders’ – engagement, and the alignment of an organisation’s climate and nature targets.
The draft disclosure recommendations have also been expanded to incorporate dependencies and impacts on nature alongside risks and opportunities to the organisation.
In addition, the TNFD has proposed an “adaptive approach” to the application of its disclosure recommendations “to accommodate the varying materiality and reporting preferences and needs” of report preparers, and to support “early action by companies and financial institutions and encourage increasing disclosure ambition over time”.
In related news, the members of the Finance Sector Deforestation Action (FSDA) investor initiative have laid out expectations for companies being engaged.
Launched at COP26, the FSDA aims to eliminate commodity-driven deforestation from portfolios and drive progress towards a net-zero, nature-positive economy. Members include LGIM, Schroders, Storebrand and JGP.
The cross-sector expectations include setting public commitments on deforestation-free and conversion-free production or sourcing, as well as performing ongoing due diligence on operations and/or sourcing areas, suppliers and financed projects/clients for compliance with commitments on deforestation, conversion and human rights abuses.