The new TNFD framework (Taskforce for Nature-related Financial Disclosures) provides an opportunity for the financial sector to better understand their risks and opportunities related to nature
Sitra is implementing a project aimed at increasing nature-related knowledge and supporting the adoption of the TNFD in the Finnish financial sector. During the project, we will organise a series of workshops during 2024 to facilitate a better understanding and practical implementation of the LEAP process outlined in TNFD.
Interested? Read more about the programme and apply!
Why Nature matters for investors?
Nature has been dubbed the ‘next climate’ in sustainability circles, signalling the shift from a carbon-centric view of sustainability to one that considers a more holistic approach. Our societies, economies and financial systems all depend on nature. Without a healthy and functioning natural environment, we cannot sustain a healthy and functioning economy.
While nature loss is a global and systemic issue, it is also relevant at the portfolio and company level. In 2023, the World Economic Forum recognised various environmental issues as the highest-priority long-term risks facing global business. BCG has estimated that biodiversity loss and degradation of ecosystem function results in a global economic loss in excess of US trillion annually.
Figure 1 Nature-related risks are critical to consider (source TNFD in a Box, Module 1)
Additionally, nature & biodiversity loss is more complex than climate. In fact, climate change is just one driver of nature & biodiversity loss. Other drivers include land-use, pollution, natural resource exploitation and invasive species.
So, what should we do?
Most companies and investors currently do not understand their exposure to nature-relate risk and are inadequately accounting for nature in decision-making and capital allocation. Addressing this knowledge gap is the first step for investors to address nature.
What is the TNFD?
The TNFD (Taskforce for Nature-related Financial Disclosures) is a new nature framework for organisations to understand and disclose their nature-related risks and impacts.
The TNFD can be used to understand how impacts and dependencies on nature can impact business financials and investment returns. Examples of corporate nature dependencies include water stress within textile or microprocessor supply chains, invasive species in biomass and agricultural production or over-exploitation of aquatic resources.
For investors, there are two main implications. Firstly, TNFD disclosures will provide a new resolution of data for investors to use for assessing companies’ environmental sustainability. The TNFD is one of a growing number of frameworks and standards that are expected to significantly increase the quality and quantity of data available for investors’ nature-related analysis.
Secondly, the TNFD is the most relevant framework for many institutional investors to use internally to better understand the nature-related risks and impacts of their own portfolio. This means that investors that recognise nature as a key issue should start to familiarise with how to implement the TNFD.
How is the TNFD structured?
The TNFD builds on the foundation of the climate-focused TCFD framework and has been developed in an iterative process with several public rounds of consultation. Like the TCFD, TNFD disclosures are structured around the topics of governance, strategy, risk management and reporting.
The TNFD also includes a detailed collection of guidance material to help corporates and financial institutions undertake their assessments of nature. This guidance is more extensive than that provided within the TCFD and is based around the LEAP framework: Locate, Evaluate, Assess and Prepare.
Figure 2 The LEAP approach (sourced: TNFD in a Box, Module 4)
The TNFD also provides a list of core global metrics, as well as sector specific metrics, that help to set a standard on how to measure nature impacts. This is specifically relevant for investors looking for metrics to quantitively measure their portfolio’s impacts on nature.
Figure 3 Example nature-related metrics (sourced TNFD in a Box, Module 5)
How can investors get started with the TNFD?
Early-stage pilots have been ongoing for the past 18 months and now implementation has started in earnest from January 2024, with the launch of the TNFD early-adopters list at the World Economic Forum in Davos, Switzerland. Over 300 corporations and financial institutions from around the world, representing over $14t AUM, signalled their intent to adopt the TNFD.
For investors deciding how to address nature & biodiversity within their sustainability approach, it is important to consider how adoption of the TNFD can help to comply and enhance mandatory regulation, such as the CSRD.
In contrast to the TNFD, the CSRD mandates disclosures without providing much detailed guidance for how the information to be disclosed should be produced. As a voluntary framework, the TNFD LEAP framework can be used by organisations to help structure their approach to nature. There is formal alignment between the TNFD and CSRD, adding confidence that using the LEAP framework help businesses to effectively report in a compliant manner.
Assessing nature risks and impacts is a new endeavour for many investors that requires new data points. Metrics are explicitly defined within the TNFD framework, however initial coverage could be sparse and it is important to consider how your data provider can provide your with the necessary information to undertake a TNFD assessment.
It is also advisable to begin your TNFD with the sectors or asset classes with the most material impacts or dependencies on nature. Focusing allows investors to get used to the TNFD methodology, while high-impact companies are more likely to have data available for analysis. The TNFD currently provides draft sector-specific guidance for a number of these sectors.
Where can you find out more?
The TNFD has published all materials publicly and a comprehensive overview can be found within their Recommendations report. The TNFD in a Box series is a great place to start to get an understanding of the basic concepts and action steps related to the TNFD.
Sitra is running a TNFD Upskilling Programme for Finnish asset managers, institutional owners and lenders that will cover practical implementation of the TNFD. Applications are open until the 10th of May and relevant organisations are encouraged to apply. More information can be found here.
Jarrod Luxton
Senior Lead, Nature and the Economy
Member of the Board, Finsif
Finsif members
Come and join our Sääntömääräinen kevätkokous (Spring Meeting) for hearing Jarrod´s presentation:
”Nature: the next frontier for sustainability” and TNFD- methodology”
