The release of the Taskforce on Nature-related Financial Disclosures’ beta version of a disclosure regime for nature impacts and dependencies is particularly significant given the increased global and national focus on ESG.
This topic is among the issues that will be discussed at our Urban Greening event on 28 July in Sydney.
The Taskforce on Nature-related Financial Disclosures (TNFD) has released a beta version of a disclosure regime for nature impacts and dependencies. This is the first integrated approach to incorporating nature-related risk and opportunity as key factors in corporate and financial decision-making.
The TNFD is a global, market-led initiative which aims to develop and deliver a risk management and disclosure framework for organisations to report and act on nature-related risks. This framework ultimately aims to support a shift in global financial flows to nature-positive outcomes. Using similar terminology and structure to the voluntary framework created by the Taskforce on Climate Change Financial Disclosures (TCFD), the TNFD beta framework ultimately aims to shift the flow of global capital to nature-positive outcomes through better risk management and capital allocation decision-making.
The TNFD framework beta version is comprised of three main components:
- fundamental concepts and definitions for understanding nature for market participants;
- the draft TNFD Disclosure Recommendations; and
- the LEAP Process for Nature-related Risk and Opportunity Assessment.
Fundamental concepts and key definitions in the TFND disclosure regime
The beta framework includes an outline of fundamental concepts and definitions for understanding nature that the TNFD recommends market participants use when assessing and disclosing their nature-related risks and opportunities. Key definitions include:
- Nature: the natural world, with an emphasis on the diversity of living organisms (including people) and their interactions among themselves and with their environment. It can be understood through a construct of four separate realms: Land, Ocean, Freshwater, and Atmosphere.
- Biodiversity: an essential characteristic of nature that is critical to maintaining the quality, resilience and quantity of ecosystem assets and the provision of ecosystem services that business and society rely upon.
- Natural Capital: the stock of renewable and non-renewable natural resources (e.g. plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people.
- Environmental Assets: the naturally occurring living and non-living components of the Earth, together constituting the biophysical environment, which may provide benefits to humanity.
Overview of the beta version of the TNFD framework
The beta version of the TNFD framework consists of draft disclosure recommendations and guidance on nature-related risk and opportunity analysis for companies and financial institutions.
The regime would require disclosure of:
- governance of nature-related risks and opportunities;
- actual and potential material impacts of nature-related risks and opportunities on a company’s activities, strategy, and financial planning;
- how the company identifies, assesses and manages nature-related risks; and
- the measures and targets.
The TNFD framework is based on key TNFD principles, including:
- Market usability: directly usable and valuable to market participants, particularly corporates and other financial institutions, as well as policy and other actors.
- Science-based: follow a scientifically anchored approach, incorporate well established and emerging scientific evidence, and converge towards other existing science-based initiatives.
- Nature-related risks: embrace nature-related risks that include immediate and material financial risks, as well as nature dependencies and impacts and their related organisational and societal risks.
- Purpose-driven: actively reducing risks and increasing nature-positive action by using the minimum required level of granularity to ensure achievement of the TNFD goal.
- Integrated and adaptive: can be integrated into and enhance existing disclosures and other standards. Account for and be adaptive to changes in national and international policy commitments, standards and market conditions.
- Climate-nature nexus: employ an integrated approach to climate and nature-related risks, scaling up finance for nature-based solutions.
- Globally inclusive: ensure the framework and approach is relevant and accessible worldwide, across emerging and developed markets.
Draft disclosure recommendations
In response to feedback by market participants seeking a consistent and integrated approach to reporting, the TNFD’s draft disclosure recommendations build on those already recommended by the TCFD. They are in line with the TCFD’s four pillars of disclosure: governance, strategy, risk management, and metrics and targets.
The draft recommendations include four general requirements that disclosures should be based on:
- assessment of nature-related dependencies and nature impacts;
- consideration of location;
- consideration of capabilities for nature-related risk and opportunity assessment and management; and
- a statement of the scope of disclosures and what will be covered in future disclosures.
The LEAP Approach
The TFND has also developed a first version of an integrated nature-related risk and opportunity assessment process called LEAP. The LEAP approach is voluntary guidance for corporates and financial institutions on how to undertake nature-related risk and opportunity assessment and incorporate
The LEAP approach has four key aspects:
- Locate your interference with nature;
- Evaluate your dependencies and impacts;
- Assess your risks and opportunities; and
- Prepare to respond to nature-related risks and opportunities, and report to investors.
The focus audiences for the first prototype of the LEAP approach are financial report preparers and users (eg. investors, creditors and insurers), as well as risk management and operations teams. The executive summary states that LEAP is designed to enable a wide range of companies to undertake a structured, science-based assessment of nature-related risks and opportunities.
The taskforce has also released a discussion paper setting out a landscape mapping of data platforms and sources, and two case examples of how data and analytics can be used in the TNFD nature-related risk and opportunity assessment process.
What’s next for the beta version of the TNFD framework
There are several ways market participants and other stakeholders can test and provide feedback on the first beta version of the TNFD framework:
- Organisations can review and comment on the draft framework, as well as the data discussion paper, on the TNFD online platform and provide feedback using its feedback functions. Early feedback over the next 45 days is especially welcome from corporates, financial institutions and regulators.
- Corporates and financial institutions keen to explore how the TNFD framework might apply in their specific organisational context can pilot test the framework independently and, in some cases, through industry collaborative efforts outlined on the TNFD online platform. Pilot testing of the beta Framework will commence on 1 June 2022.
- Based on the feedback provided by market participants, the TNFD will then convene Focus Group discussions – around key emerging themes, or by geography or sector – to engage feedback providers in further detail.
The TNFD’s open consultation period will continue until 30 June 2023. Pilot testing of the beta version will begin on 1 June 2022 and continue until 30 June 2023, with further drafts and guidance to be released later in 2022. The TNFD alliance aims to release its final recommendations in the second half of 2023. Further work is also underway on other areas, including the links to, and interplay with, climate change, scenario development, the scope of disclosures, social dimensions, defining nature-positive, data and metrics, and sector-specific guidance. Feedback can be submitted through the online portal here.
The Australian Sustainable Finance Institute, which has members including major banks and super funds, signalled that one its four strategic priorities in 2022 is to help provide “a well-coordinated Australian voice” in the development of the TNFD regime. The release of the framework is particularly significant given the increased global and national focus on ESG.
Claire Smith and Alice Brennan, Clayton Utz.
Disclaimer: Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.