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Nature disclosures ‘will become the norm’

Author: ICAEW Insights

Published: 20 Sep 2023

The final TNFD recommendations were launched at New York Climate Week. Toby Roxburgh, ICAEW’s Sustainability Manager, Nature and Biodiversity, explains what this means and why it matters.

The Taskforce on Nature-related Financial Disclosures (TNFD) has published its much-anticipated final recommendations to enable global corporates and financial institutions to begin reporting and managing nature-related issues. The launch at the New York Stock Exchange is a significant step towards aligning our economies and finance system with a nature-positive future. Businesses and financial institutions now have the tools they need to act. 

With a call for immediate adoption, the TNFD’s key message to business and finance leaders is “it’s time to get started”. The accounting profession must seize this opportunity to help mainstream TNFD reporting across the economy, leveraging our collective influence, skills and resources to help transform business models and turbo-charge transformative nature-positive action and investment.

This week’s publication of 14 recommended disclosures and a suite of additional implementation guidance marks the culmination of a two-year consultative development process, including pilot testing by more than 200 companies and financial institutions.

Building on the Taskforce on Climate-related Financial Disclosures (TCFD), the TNFD’s disclosure recommendations are structured around four pillars: governance; strategy; risk and impact management; and metrics and targets. They align with the Global Biodiversity Framework (GBF), including Target 15, under which the world’s governments agreed to ensure that all large companies assess and disclose their risks, impacts and dependencies on nature by 2030. 

Recommendations are also consistent with the global sustainability standards of the International Sustainability Standards Board (ISSB), and the impact materiality approach used by the Global Reporting Initiative (GRI) and incorporated into the new European Sustainability Reporting Standards (ESRS).

Additional guidance for financial institutions explains how to apply the TNFD recommendations, including draft metrics for feedback. The taskforce has also created a ‘how-to’ guide on the identification and assessment of nature-related issues (called the ‘LEAP’ approach),  and guidance on the use of scenarios, among other materials. More will follow.

Nature risk is financial risk

Nature is declining faster than at any time in human history. But this isn’t just an environmental crisis; it’s a crisis of our economy and finance system. Every business depends on nature and the benefits it provides. The provision of food, water, fibre, minerals; pollination of crops; protection from hazards such as flooding, erosion and storms; climate regulation – all are dependent on nature and biodiversity. 

The breakdown of our natural life support systems is putting many of nature’s vital services at risk, disrupting business operations and supply chains through resource shortages, loss of pollinators, more extreme flooding, droughts, wildfires and extreme weather. This is creating mounting physical risks for businesses through production outages, higher operating costs, and reduced cash flows and enterprise value.

More than half of the world’s economic output (equivalent to around equivalent to $58trn) and over half of the market value listed on 19 of the world’s major stock exchanges, is moderately or highly dependent on nature. Investors, lenders and insurers are also exposed. Low-income countries, whose economies are more reliant on nature, stand to lose the most.

As the nature crisis worsens, momentum is building behind a shift to a nature-positive future. Investors, consumers and other stakeholders are demanding increased transparency. Central banks and financial supervisors are increasingly concerned about systemic financial risks. 

Policy and regulation are also evolving at pace, such as the global commitments under the Kunming-Montreal Global Biodiversity Framework (GBF), the EU Deforestation-free Products Regulation, the EU Corporate Sustainability Reporting Directive, and biodiversity net gain requirements under the Environment Act 2021. These policy changes reflect growing stakeholder concern, and create elevated transition risks. 

Nature is a material consideration with far reaching financial consequences, impacting supply chains, entire sectors and stability in the wider financial system. But with every crisis comes opportunity; mobilising business innovation and finance to reverse nature loss will be a major source of new market opportunities and competitive advantage. 

While the case for action is clear, business and finance organisations today do not have the information they need to understand the risks and opportunities for their organisation that result from their impacts and dependencies on nature.

What is the TNFD?

The TNFD was established in 2021 to fill this critical information gap as a global, market-led, science-based and government-endorsed initiative. Its recommendations and guidance are designed to help organisations report and act on evolving nature-related issues, with the ultimate aim of supporting a shift in global financial flows away from nature-negative outcomes and toward nature-positive ones.

The Taskforce itself consists of 40 senior executives from financial institutions, corporates and market service providers with a market capitalisation of over US$2.3trn, and more than US$20.6trn in assets under management.

The TNFD has called for companies and finance institutions to adopt the TNFD recommendations now on a voluntary basis, while in parallel it will continue to inform ongoing development of global reporting standards (such as the work of the ISSB) and regulation. 

Risk brings opportunity

While the TNFD’s recommendations are voluntary, the prevailing view is that regulation is coming. Many countries have already indicated intent to do so ahead of the Target 15 deadline of 2030. 

TNFD is also expected to be translated into global reporting standards far faster than TCFD. ISSB and GRI have both welcomed the TNFD’s consistency with evolving standards.

Besides getting ahead of regulation, implementing the TNFD framework now will enable companies to start to incorporate nature-related issues into their strategic planning, risk management and asset allocation decisions, unlocking opportunities to build enterprise value and resilience.

For investors and other capital providers, getting started on TNFD will help them to better manage the nature-related risks associated with their portfolios and shift capital flows to more positive outcomes for nature and society.

As we will cover in a subsequent article, it may be easier to get started with TNFD than you think.

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