Emerging Frameworks - what is the TNFD?

The environmental, social and governance (ESG) landscape is filled with voluntary reporting frameworks to help companies disclose various aspects of their business. Two predominant frameworks are the Global Reporting Initiative (GRI), which is recommended for a broad stakeholder audience, and the Sustainability Accounting Standards Board (SASB) framework, which is industry specific and focused on an investor audience. Other frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB), look more closely at the material risks, opportunities and financial impacts related to sustainability issues, including climate change. But as jurisdictions around the world mandate ESG disclosures, it’s natural for additional frameworks to emerge that offer new ways for companies to disclose risks and opportunities relevant to their operations.

Our global economy is highly dependent on nature

Many believe that the Earth’s fragile ecosystem services are at an important juncture. Depending on a company’s business model, changes to the ecosystem could have surprising impacts to a company’s long-term growth and profitability. While most obvious for agricultural or food processing companies, the effects of natural capital can be widespread. As investors increasingly consider how to address biodiversity as part of their portfolio strategies, there’s a growing need for companies to be able to disclose nature-related risks and opportunities. It’s estimated that more than 50% of global GDP depends on nature , and biodiversity loss from ecosystem services — such as pollination, food from marine fisheries and timber from forests — could lead to a $2.7 trillion annual decline of global GDP by 2030 . However, according to the World Economic Forum, action for nature-positive transitions, such as shifting to a clean energy economy, could generate up to $10.1 trillion in annual business value and create 395 million jobs by 2030 .

Why was the TNFD created?

The Taskforce on Nature-related Financial Disclosures (TNFD) was created with the goal of shifting the global financial system away from exploiting natural resources to supporting them. Biodiversity loss can pose significant operational risks , especially for industries that are directly dependent on access to natural resources, such as freshwater. Therefore, it’s reasonable that corporations consider preparing to??disclose how they intend to mitigate or avoid the loss of natural resources, or plan to protect and support their long-term sustainability.

What is the TNFD?

The TNFD is an international cross-sector initiative established in 2021 and is designed to help companies integrate nature into their decision-making. It’s a publicly funded, market-led initiative and is backed by G7 and G20 political leaders. The Taskforce currently consists of 34 private sector members from corporations, financial institutions and market service providers representing $19.4 trillion in assets.

Under the guidance of the Taskforce, a risk management and disclosure framework was developed and focuses on several principles: market usability, science based, nature-related risks, purpose driven, integrated and adaptive, climate-nature nexus, and globally inclusive.

Why is the TNFD needed?

Currently, corporations, investors and financial institutions don’t have the information they need to understand how nature impacts an organization’s immediate or long-term financial performance. Also lacking is information on how an organization either positively or negatively impacts nature and the long-term risks associated with those impacts.

With better nature-related information, asset managers, financial institutions and investors can better understand immediate and long-term nature-related risks and opportunities. As market regulations continue to ramp up, it’s likely that investors will redirect capital away from businesses that directly or indirectly impact biodiversity in a negative way.

Who uses the TNFD?

The target users and beneficiaries of the TNFD include investors, banks, insurance companies, analysts, corporations, regulators, stock exchanges and accounting firms. From a capital market perspective, large asset owners and asset managers can ask portfolio companies to provide nature-related financial disclosures and risk management aligned with the TNFD. Banks and insurance companies can also use the disclosures to support more informed lending and coverage based on enhanced risk profiles. Additionally, as more stakeholders incorporate the TNFD into their reporting strategies, it’s critical that finance teams become familiar with the framework and what nature-related information may need to be tracked and reported. Similar to climate-related risks and opportunities, for many companies, natural capital can represent similar prospects. To the extent financial professionals can help provide robust, high-quality, comparable and consistent information for both internal and external users, better decisions can be made by all stakeholders.

How is the TNFD related to the TCFD?

The TNFD takes inspiration from the TCFD as both initiatives seek to shift capital flows toward more sustainable outcomes by using risk management and disclosure of nonfinancial information as a vehicle for sharing corporate information with investors. The draft disclosure recommendations for the TNFD’s beta framework use the same pillars as the TCFD: Governance, Strategy, Risk Management, and Metrics and Targets.

The two frameworks are complementary, but there are key differences in the draft guidance. For example, the TNFD helps companies capture specific nature-related impacts, such as plastics present in the oceanic food chain or loss of soil fertility caused by land use change. The TNFD also encourages integrated climate and nature-related risk management and disclosures by using both frameworks in tandem.

The TNFD’s beta framework is designed with an investor audience in mind, similar to the ISSB. However, there is also embedded flexibility for those reporting to a broader stakeholder audience.

LEAP: a nature-related risk and opportunity assessment

The TNFD guidance uses a LEAP (locate, evaluate, assess, prepare) approach to nature-related risk management. This simplified method was designed to be an iterative approach to reporting on each of the four pillars of the TNFD. It helps corporations and financial institutions:

·??????Locate your interface with nature.

·??????Evaluate your dependencies and impacts.

·??????Assess your risks and opportunities.

·??????Prepare to respond to nature-related risks and opportunities, and report to investors.

The TNFD also developed a LEAP-FI approach specifically for financial institutions to help them assess their portfolios. In addition to the specific steps recommended for corporations throughout the standard LEAP process, the LEAP-FI approach also includes four guiding questions that help define the type of financial institution and class of assets under management. ?

Next steps

After the TNFD released its first two beta frameworks in March and June 2022, its most recent release was in November 2022 . The next beta framework is expected to be released in February 2023, with the final recommendations expected in September 2023. Stakeholders can get involved by joining the TNFD Forum , testing the beta frameworks and providing comments on their usability. Corporations from a variety of sectors are also encouraged to take part in the TNFD pilot to get a better sense of how the TNFD functions and provide feedback prior to its final release.

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The views expressed by the author are his own and not necessarily those of Ernst & Young LLP or other members of the global EY organization. Moreover, they should be seen in the context of the time they were made.