Getting to the heart of nature-related risks

It was wonderful to see the final launch of the Task Force for Nature-related Financial Disclosures (TNFD) framework in September.

Central to TNFD is the LEAP approach:

  • Locate the interface with nature,
  • Evaluate dependencies and impacts,
  • Assess risks and opportunities,
  • Prepare to respond & report and evaluate dependencies and impacts.

Source: TNFD Beta Framework

Asset owners, asset managers and companies have now become familiar with the Task Force for Climate-related Financial Disclosures framework (TCFD), and when reviewing TNFD, they’ll notice some strong similarities. Although the amount of recommended disclosures are higher (14 altogether), the same structure, language and approach across TNFD has been used as TCFD. The same four pillars are used – ‘governance’, ‘strategy’, ‘risk & impact management’ and ‘metrics & targets’.

Eleven categories of disclosure were carried over from TCFD (but with a nature emphasis), and three further disclosures were added covering important areas of nature around the topics of engagement, sensitive locations and value chains – which I’ve summarised below:

Engagement:

Companies must describe their human rights policies and engagement activities, alongside oversight by the board and senior management with respect to impacts on indigenous peoples and local communities

Value chains:

Companies must describe their processes for assessing and prioritising nature-related dependencies, impacts, risks and opportunities across their supply chain

Sensitive locations:

Companies must disclose the locations of assets or activities in locations they have direct control over, and where possible, their supply chains

The right metrics

The TNFD framework has selected 14 core global indicators and specific metrics for each indicator. These were carefully selected because they apply to the majority of business models across most sectors. These are split into nine ‘dependency and impact’ indicators and five ‘risk and opportunities’ indicators. These are summarised at the end of this article.

TNFD centred on decision-useful metrics that are grounded in science and can be practical to collect at a reasonable cost. The focus is on measuring drivers of change, which are easier to collect and attributable directly to business and finance – and both negative and positive impacts need to be acknowledged in separate reporting for greater transparency. If we take pollution as an example, this will mean companies reporting on pollution production (negative impact) and reporting on factors such as pollution removal, reuse or recycling (positive impacts).

Additional recommendations were made for financial institutions to report on two global metrics:

  • Financial exposure to a defined set of sectors considered to have material nature-related dependencies and impacts
  • Financial exposure to companies with activities in sensitive locations

Asset owners and asset managers:

Absolute amount or percentage of invested or owned assets

Breaking the metrics down

There is also an expectation that financial institutions will report on the five-core global risk and opportunity metrics, which are outlined below:

Nine ‘dependency and impact’ indicators

Driver of nature change Indicator
Land/Freshwater/Ocean-use change 1. Spatial footprint

2. Extent of land/freshwater/ocean-use change

Pollution/Pollution removal 3. Pollutants released to soil split type

4. Wastewater discharged

5. Waste generation and disposal.

6. Plastic pollution

7. Non-GHG air pollutants

Resource use/Resource replenishment 8. Water withdraw and consumption from areas of water scarcity

9. Quantity of high-risk natural commodities sourced from land/ocean/freshwater

Climate Change GHG emissions

 

 Five ‘risk and opportunities’ indicators

Risk/Opportunity Metric
Risk 1. Value assets, liabilities, revenue and expenses that are assessed as vulnerable to nature-related transition risks (total and proportion of total)

2. Value of assets, liabilities, revenue and expenses that are assessed as vulnerable to nature-related physical risks (total and proportion of total)

3. description and value of significant fines/penalties received/litigation action in the due negative nature-related impacts

Opportunity 4. Amount of capital expenditure, financing or investment deployed towards nature-related opportunities, by the type of opportunity, with reference to a government or regulator green investment taxonomy or third-party industry or NGO taxonomy, where relevant

5. Increase and proportion of revenue from products and services producing demonstrable positive impacts on nature with a description of impacts