Making the business case for TNFD

I'm pleased to share insights from the Responsible Investment Association Australasia (RIAA) session on the Taskforce on Nature-related Financial Disclosures (TNFD) .

The focus was evolving disclosure expectations, business drivers for adoption, case studies and the Australian Governments position, well hosted and directed by Estelle Parker

I'll take you through it speaker by speaker, and have done my best to accurately capture and summarise what was said though they are my typed notes.

To set context for you, I felt this was best delivered through a Q&A during the middle of the 2 hour workshop;

Megan Pritchard;

"How will TNFD have an impact at ground level - improving biodiversity, enhancing ecosystem services, protecting significant conservation and native species targets - and what opportunities are there for conservation and nature protection organisations to collaborate with the corporate sector?"

Guy Williams;

"Thanks Megan .. Please reach out to RIAA for the work of the Nature Working Group to build conversation and partnership with conservation NGO's to broaden that collaboration.

Also we need to be clear on what the TNFD is and what it is not.

TNFD aims to develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks. Whilst it has an ultimate aim to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes, it is not expected to be the only lever or driver to address the biodiversity crisis.

There is a need for various other aligned activities to support targeted on ground action on improving biodiversity and enhancing ecosystem services."

Experience matters

Thanks to the contributors;

Timothy King, CFA got us going;

Today we have a good understanding of the concept of climate risk, though not an equivalent understanding of the nature risk.?

In three examples;

1. Agricultural companies such as berry producers not grasping a 'scope 1 nature risk' of the inability of bees to pollinate.
2. All businesses in some form or another, are dependent on the ability to access semi-conductors, and Taiwan is having ongoing drought and water is a key component in semi-conductor manufacturer.
3. An element of social license, in that German buyers are threatening to boycott Spanish strawberries due to farmers using illegal wells and depleting the water table to produce the crop.

Nature is a very real risk of varying degrees, and what TNFD does is bring a structural framework in having consistent data in understanding this risk, and to prepare and respond to it.?

Ed John , Executive Manager of Stewardship at Australian Council of Superannuation Investors , along with Christian Gergis , Head of Policy at the Australian Institute of Company Directors then joined Tim in a panel discussion.

Ed John;

Large asset owners are looking at 5, 10 and 20 year fund cycles.?Their investment exposures are large, economy wide and long term, all underpinned by nature, with immense social and cultural value inherent in them, not simply that humans need nature to exist.

In this way, we need to bring global challenges into specific, company level issues that can be worked on.

The economic figures are obvious and stark, projects include $20BN in losses for Australia related to impacts on nature.

From the Global Biodiversity Framework developed in 2020, 190 countries set ambition goals and targets with individual countries taking action.

There has been recognition of biodiversity loss as a systemic risk by world banks.

We've known about this for some time, though without a framework and data, it's hard to translate this into specific actions, and that's where TNFD provides an incredibly useful tool - it enables us to set expectations and get thinking internally around where risk value drivers sit.

The intention of the taskforce is to increase ambition over time, and the incorporation of nature related issues?- investors can't really price the risks or the issues or engage around them if there isn't a decent level of data and disclosure.

Soil degradation, deforestation, water management - these are all very much in the management line wheelhouses - the label may not get people engaged, though if we dig deeper these touch specifics in a lot of businesses that can be acted on.

Don't let perfect be the enemy of good - there will be gaps in early years of reporting, for companies thinking through the framework, don't wait till you have the 'perfect stage 5 piece' - do the work, start the process, be informed, take first steps.

Christian Gergis;

There is increasing awareness of the Director community to nature-related risk, balanced with the bandwidth issues of boards.

These are significant including climate change, management reporting, mandatory climate reporting, ISSB standards .. If Executives and investors want cut through - link biodiversity to your climate goals as an adjunct, not a 'new area' boards need to consider.

Christian suggested that nature discussions will move much more quickly than a climate policy debate, as everyone loves the natural environment.?This was spoken to several times throughout the morning.

Timothy King:

Education plays a huge role;?What does 'nature' mean??We're asking companies to do so many things, report on climate risk, nature risk, gender diversity, modern slavery, it's only increasing and will continue to grow.

The science embedded in nature is much more complex and less developed than that of climate, fundamentally;

- Whos going to do the work?

- Where's the data going to come from??

The systems aren't currently there and in contrast to Ed saying we better get on with it, we have tremendous bandwidth constraits.

Are we moving too fast??We're moving too slowly from a macro sense..?though given all the constraints, the key issue is skills.?

This requires multiple actors.. deep science across a whole range of different disciplines.?

We already have a STEM shortage.

Christian:

..and without these skills, theres a huge risk of greenwashing - as people move to disclose due to market pressures, they are unable to do so effectively.

A simple initial step from a governance perspective is to identify;

- Who's responsible

- how high a priority is this?

- What resourcing are we going to give it?

There are relatively few examples of good reporting and this needs to be a collaboration between the corporate sector and investors.

Don't hit us over the head with this issue, though it's incumbent for us to move in this direction.

Ed John;

Underlying all of this is a question of data expertise.

A lot of these issues have placed based / geographic overlays, and the complexity of not being individually determined due to companies reporting without standardisation.

Estelle Parker;

In the presence of these challenges and lack of exmaples of leadership, what can we do to get going?

Ed John;

Meet organisations where they are at.?Work bottom up and engage with highly exposed companies, for example agriculture with soil, mining with deforestation and site remediation.?

Look for the risks and indicators that are accessible to kick start the discussion.

Christian:

The most effective tool a board member has is asking questions.?Asking managers related questions will raise this in their field and

Tim:

Wether the Board, Subcomittees or Executive Management take ownership of this, that is crucial.

Alexandra Brown of Ethical Invest Group asked about examples of good reporting and resources we can look to for best practice;

Tim:

The three things I would do to gain and understanding of everything we're talking about;

1.?Try and read at least the summary of nature risk via https://tnfd.global/

2.?Read the most recent state of the environment report in Australia

3.?Look at the BHP Case Study (see further in this summary)

Ed:?

Looking at those who followed the climate path.?Companies that went early saw the value and didn't have to suffer with mandatory compliance.

No business on a dead planet

Heard that headline before? Me too, though it never seems to stop having a certain unnerving charm and was an opener used by Carolin Leeshaa at KPMG ;

Carolin shared how tackling climate and nature at the same time are two sides of the same coin, and as we are living through a climate and biodiversity emergency, why not do both?

The TNFD can act as a lever to contribute towards sustainable finance targets, and go to its core missions, which is to reorient investors to reward environmental stewardship.

1.?Get started now.

It's a complex space, you can't wait until reporting frameworks become mandatory.?It's better to be on the front foot and start preparing early.

2.?There's a propensity to talk about the economic upside of redressing nature.?SIgnificant numbers are being tossed around globally.?Eg the transition to a nature positive economy could unlock 350,000 jobs.

These numbers haven't been translated into what this does or could look like.?Carbon markets have been extensively researched and debate, much less work has been put into examining positive, nature related pathways and quantifying the economic benefits beyond carbon.

The positive impact on local jobs is tremendous - comprising both technical green jobs and also lower skilled jobs to transition regions in Australia and htose hit by the pandemic.

3.?Environmental markets are only 1 of the many econimc activities that need to be unlocked for the netzero and nature positive transition of the Australian economy.

Nature positive also comprise new business model and products that work to halt and reverse nature loss.?If we look at bio-packaging to replace plastic, nature tech startups, the whole ecosystem of technology entrepreneurs?and such.

Carolin shared a range of exciting developments company wise and I put into the chat my inspiring experience at Peter Castellas Climate Investor Forum and discovering companies such as Rob Waterworth and FLINTpro .

Carolin summised with saying we expect more, not less regulation, citing a raft of regulations and movement from Governments and Banks through Europe who are demanding transparency and mandatory?reporting that will give strong signals to Australian exporters to impelement nature related due dilliegence systems and risk management systems.

The key point of this slide is 'speed'?- what took Climate 10-15 years, took Nature 10-15 months.

There is a rapidly evolving market maturity.?

Take a phased approach and embed nature across climate and then portfolios.?

BHP Case Study

Tim Cooper ".. I'm going to convince you in the next 10-15 minutes to put nature in the language of economics as a way to gain acceptance and support of Executives at a senior level.

We haven't previously taken a holistic approach to accounting for nature and Natural Capital is an answer to this.?

This case study particularly was a leaning in to develop this - we raised more questions than we answered.

The primary purpos was to see the change in land use and see what effect this had on the site.."

I include the disclaimer because Tim did, in short 'this is not a forecast'

A blend of frameworks was used to create the case study;

Tim;

Even though we had access to this site for 20 years, we needed to go to site and get data to complete this.

If you're going to do something like this, engage the financial and accounting teams early and often.

This is not a financial report, it's an example of how a natural capital account could be constructured and we've done it to guide future studies.

Tim spoke to conversations had with the accountants of 'why are we doing this, there is no standard, what if its wrong' - and the point was, to get out there to do it and set an example and progress the field.

You can access the?report by clicking here .

Tim also shared examples for Forico Pty Limited as things to look at, the 2021 report is here and the 2022 report is accessible via their website .

Tax matters!

Alexandra Banks then took us through several areas;

The struggle of the tax team having to explain to the sustainability team why tax matters,

The environment team, investors and the community having different versions of materiality, eg 'it's not just about water usage, it's about cultural heritage'

Understanding why the TCFD are leaning very hard into the alignment with TNFD, and it's clear why they are doing it - though also the false confidence this can engender;

'We've solved climate, how hard can nature be?' - whilst these are inextricably linked, they exacerbate and will solve each other, though your Climate team will not be able to pivot and solve the Nature portfolio.

You're going to need new skills and capabilities you didn't have before, though the logic, information and architecture built into organisations will form how your organisation turns to Nature.

***

A profound question asked in the chat by A. Richman;

".. Should we be limiting our conceptualization of nature to only those aspects of nature that provide services to people?

Does that risk perpetuating the very short sightedness that got us to a point where we are talking about a nature loss existential crisis?

Or do we think that even if we think about nature as simply providing services to people, that is still broad enough to capture all our material impacts on nature?

Given the extent to which we've degraded nature, should we be assessing improvement against a degraded baseline or against its potential if it were spared from human exploitation and restored?

Astralian Government & TNFD

Arianna Cowling took us through work being done behind the scenes, and that

consistent nature disclosures are the way forwards;

There is also a raft of regulatory initiatives going on, both globally and nationally;

Notably in the recent budget, $120M+ set aside for the development of the new Environment Protection Australia (EPA), + $50M for Environment Information Australia (EIA).

This is to identify and address critical environmental information gaps, and be the custodian of Australia's environmental data.

The take-aways (delivered to your house in a bow by drone)

Estelle Parker brought the session to a close asking for the tips from the 2nd segment panelliests;

Alexandra Banks:

It's about location and data.?You need to know where things are at risk in your value chain, though there is a lot you can do without location specific data in the interim whilst you work to get that traceability.

If you have a property company and timber is a major input, you know you have a major dependecy without knowing where it comes from.

Don't let the need for location specificity delay action and the same of data.

Yes we'd like more, wrapped up in a box and delivered to the house by a drone, though there is lots available and we can get going.?There's enough to get started now.

It's really fun and super interesting, yes it's daunting, though it's absolutely fascinating - people love nature and talking about it, you can lean into this passion fo rnature that people inherently have and use this a a superpower to get this on the exectuvei agenda.

Carolin Leeshaa:

Focus on materiality in addition to data.?Don't try to chew on the whole framework, look at what's financially materially in your sector and portfolio.

There is a new guide bieng produced that will be coming out in September.

Timothy King:

Keep the conversation as simple as possible for your Executives and Directors when talking about this particular topic.?

Focus on integration - recognise nature has to integrate to the climate team - Executives and Directors don't want another person walking in the door saying 'we've got to fix nature'

Thanks for reading!

I hope you enjoyed this and do share with your network so we can do more work, at scale, that matters.

As a strategist, deal maker and connector for world leading investment funds and their investees, I work with Boards, CEOs and Executive Teams to create turn-key Investor Engagement Systems? that capture the essence of who you are and why you do it, in a format others can easily engage with.

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