Where business and nature intersect: TNFD releases final draft of Nature-Related Risk Management and Disclosure Framework

April 4, 2023 | Selina Lee-Andersen

In December 2022, the Parties to the UN Convention on Biodiversity (COP 15) met in Montréal to advance global action to address the ongoing loss of biodiversity. This meeting culminated in the adoption of the Kunming-Montreal Biodiversity Framework (the Global Biodiversity Framework), which consists of 23 targets for 2030 and 4 goals for 2050 aimed at halting biodiversity loss and restoring ecosystems. The Global Biodiversity Framework builds on lessons learned from the Strategic Plan for Biodiversity 2011-2020 and the Aichi Biodiversity Targets. Canada’s key goals include protecting 30% of lands and waters by 2030, respecting the rights Indigenous peoples, and addressing the key drivers of biodiversity loss, such as pollution and overexploitation of nature. The Parties at COP 15 also agreed to a series of related agreements to facilitate implementation of the Global Biodiversity Framework (including planning, monitoring, reporting and review), resource mobilization, and capacity building.

What is the biodiversity crisis?

The biodiversity crisis refers to the worldwide extinction of different species and the local reduction or loss of species in certain habitats, resulting in a loss of overall biological diversity.  According to the 2019 UN Global Assessment Report on Biodiversity and Ecosystem Services, human activity is pushing one million species of plants and animals towards extinction. The top five drivers of nature loss are: (1) changes in land and sea use (conversion of land cover such as forests and wetlands for agricultural and urban uses); (2) climate change; (3) pollution; (4) direct exploitation of natural resources; and (5) invasive species.

The October 2022 Living Planet Report (PDF) (LPR) from WWF International indicates that global wildlife populations have experienced an average 69% drop in monitored populations of mammals, birds, amphibians, reptiles and fish since 1970. According to the report, Latin America has seen the greatest regional decline with a 94% drop in average wildlife population size, while freshwater species populations have seen the greatest overall global decline, with an 83% drop.

An evolving investment landscape

The World Economic Forum estimates that more than 50% of global GDP (USD 44 trillion of economic value) is moderately or highly dependent on nature and its services, and therefore exposed to financial risks from biodiversity loss. With more stringent targets and the implementation of new initiatives under the Global Biodiversity Framework, investors are expected to take a closer look at companies with operations in areas of significant biodiversity value or with a supply and value chain involving supplies located in such areas. As a result, an increasing number of companies are building out their sustainability policies and looking at ways in which they can incorporate biodiversity considerations into their everyday policy, risk assessment metrics and business decisions, which is known as the “mainstreaming” of biodiversity.

One of the key targets under the Global Biodiversity Framework requires large and transnational companies and financial institutions to monitor, assess, and transparently disclose their risks, dependencies and impacts on biodiversity through their operations, supply and value chains and portfolios. As companies look to mainstream biodiversity in their operations, investors are seeking greater consistency and transparency around the disclosure and reporting of biodiversity-related performance (and ESG performance more broadly) in order to mitigate risks and identify new opportunities. A number of financial institutions have shown interest in two new financial frameworks on biodiversity loss: (i) Taskforce on Nature-related Financial Disclosures (TNFD), and (ii) Partnership for Biodiversity Accounting Financials (PBAF). TNFD, which is developing a risk management and disclosure framework for organizations to report and act on nature-related risks, has the support of more than 40 different financial institutions representing US $20.6 trillion of assets. The PBAF standard, which provides financial institutions with guidance on biodiversity impact assessments, is supported by 50 financial institutions, representing US $12 trillion in assets.

TNFD releases final draft of Disclosure Framework

On March 28, 2023, TNFD released the final draft (v0.4) of the TNFD Nature-Related Risk & Opportunity Management and Disclosure Framework (TNFD Framework) for public consultation. The TNFD Framework seeks to provide market participants with a risk management and disclosure framework to identify, assess, respond and, where appropriate, disclose their nature-related issues. The TNFD Framework is nearing the end of its two-year design and development phase, and the final framework expected to be published in September 2023, along with TNFD-aligned recommended disclosures.

The TNFD Framework provides the foundation for four actions for businesses:

  1. Identify – Where the business or financed activity is interfacing with nature, identify the type of ecosystem in that location and the key environmental assets and ecosystem services that are relevant to the business.
  2. Assess – Perform an assessment of dependencies and impacts on nature, as well as risks and opportunities to the business or capital portfolio.
  3. Respond – Provide a response by re-evaluating strategy and business plans, setting and committing to outcome targets, and reviewing governance, risk management and capital allocation activities.
  4. Disclose (where required) – Outcomes along with core financial statements and emissions reporting to external capital providers.

There are four concepts at the heart of the TNFD Framework: (i) nature-related dependencies: (ii) impacts; (iii) risks; and (iv) opportunities. These are collectively referred to as nature-related issues. For practical “how to” guidance on corporate reporting activities, TNFD has developed an integrated assessment process for nature-related risk and opportunity management known as LEAP, which consists of four phases following an initial scoping of organizational priorities:

  • Locate your interface with nature (e.g. location of direct assets and operations, type of biomes and ecosystems that activities interface with, identify value chains that operate in areas of high biodiversity importance or areas of rapid decline in ecosystem integrity, what business units or asset classes are interfacing with nature in priority areas);
  • Evaluate your dependencies and impacts (e.g. identification of relevant environmental assets and ecosystem services, identification of nature-related dependencies, analysis of the size and scale of such dependencies, and size and scale of nature impacts in each priority location);
  • Assess your risks and opportunities (e.g. identification of corresponding business risks and opportunities, management of existing and additional risk mitigation and opportunities, identification of which risks and opportunities are material and should be disclosed in line with TNFD recommendations); and
  • Prepare to respond to nature-related risks and opportunities and report (e.g. decisions on strategy and resource allocation following analysis, setting targets and measuring progress, determining what to disclose, and where/how to present nature-related disclosures).

The premise underlying the TNFD Framework is that companies and financial institutions of all sizes and across sectors should identify and assess their nature-related issues along the value chain, regardless of whether they are required to disclose these issues to lenders, regulators or other stakeholders.

TNFD’s approach to disclosure builds on the recommendations developed by the Taskforce on Climate-related Financial Disclosures (TCFD) and follows the TCFD’s four pillars of disclosure – i.e. governance, strategy, risk management (TNFD has also incorporated impact management), and metrics and targets – as illustrated in Figure 4 from the TNFD Framework.

Under these four pillars, TNFD has retained all 11 TCFD recommended disclosures in order to maintain consistency between the climate and nature reporting frameworks for all sectors. The TNFD Framework adds two additional disclosure recommendations: (i) Strategy D, covering priority locations; and (ii) Risk and Impact Management D, covering stakeholder engagement.

The draft TNFD recommendations also include a set of general requirements that disclosures should be based on:

  1. organization’s approach to materiality;
  2. a statement of the scope of disclosures and what will be covered in future disclosures;
  3. consideration of nature-related risks and opportunities based on an assessment of dependencies and nature impacts;
  4. consideration of specific locations where an organization interfaces with nature;
  5. integration with other sustainability issues to the extent possible, including climate-related disclosures; and
  6. consideration of stakeholder engagement across its disclosures.

TNFD has proposed a set of 10 core global indicators for disclosure, relating to dependencies and impacts on nature. These core global indicators and metrics are outlined in Table 1 (PDF) (Annex 1) of the TNFD Framework and include, among others, the extent of land change by type of ecosystem and business activity, total water withdrawal and consumption from areas of water stress, quantity and share of natural commodities sourced from priority ecosystems (split into types), and proportion and total annual revenue exposed to physical and transition risks. TNFD is considering whether to add another core global dependency and impact metric addressing plastic production and consumption (currently listed as an additional metric). TNFD has also set out a list of additional metrics for dependencies and impacts (Annex 1), which includes positive impacts on nature and impact drivers that are widespread, but are sector-specific, such as light and noise pollution and the introduction of invasive species. Further, the TNFD Framework sets out a list of disclosure metrics (PDF) relating to the categories of Risk and Opportunity (Annex 2), Response (Annex 3), Agriculture and Food Sector (Annex 4), and Tropical Forest Biome (Annex 5).

An organization’s approach to how it measures and monitors nature-related issues is key to enabling investors and other stakeholders to meaningfully assess the organization’s risk-adjusted returns, ability to meet financial obligations, general exposure to nature-related issues, and progress in managing or adapting to those issues. To demonstrate their alignment with global policy goals under the Global Biodiversity Framework adopted during COP 15 in Montréal and other biodiversity commitments, TNFD strongly encourages organizations to include disclosures against all of the core global indicators of relevance to their business model, sector(s), biome(s) and priority locations. If organizations do not report against any of the core global indicators listed in Table 1, a short explanatory statement should be provided as to why they have not reported. When it comes to target-setting, TNFD recommends that companies set science-based targets for nature using cross-sector frameworks such as the Science Based Targets Network (SBTN) framework.

Certain areas have been identified by TNFD as priority areas for further development, including: (i) links to, and complex interplay with, climate (the climate-nature nexus); (ii) scenario development; (iii) scope of disclosures; (iv) social dimensions; (v) defining nature-positive; (vi) data and metrics; and (vii) sector-specific guidance.

The public consultation period for the TNFD Framework is open until June 1, 2023. Feedback can be provided by way of a General Feedback Form available on the TNFD web site. As noted above, the final framework is expected to be published in September 2023, along with the final set of TNFD-aligned recommended disclosures. TNFD is a welcome addition to the voluntary sustainability disclosure toolkit and the International Sustainability Standards Board has indicated that it will be addressing natural ecosystems as they impact climate, building on the work of TNFD. Given the likely influence of the TNFD Framework in investor decision making, an understanding of the framework will be fundamental for Canadian businesses, investors and other stakeholders moving forward.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s ESG and Carbon Finance team.

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