The Taskforce on Nature-related Financial Disclosures (TNFD) has released its final draft of a framework for the management and disclosure of nature-related risks.
- The fourth draft of the TNFD framework comes ahead of the final recommendations to be made in September 2023.
- Nature-related financial disclosures will fill the gap in investors’ assessment of companies’ exposure to environmental risks.
- Although the framework will be voluntary, businesses ought to familiarise themselves with its guidelines ahead of future legislation.
Since October 2021, the TNFD has been reiteratively developing its framework for the disclosure of nature-related financial risks. With the release of a fourth and final beta version, its completed recommendations are on track to be published in September 2023.
“This fourth and final draft of the TNFD framework will provide market participants, for the first time, with a full representation of the core aspects of the proposed TNFD framework,” said David Craig, co-chair of the TNFD. “This has been the culmination of a lot of work to bring a science-based approach but make the complexity of the science of nature accessible and relevant to market participants.”
Fourth revision offers clarity on proposed approach
Building on the work of the Taskforce for Climate-related Financial Disclosures (TFCD), the TNFD has taken an open and iterative approach to developing a standardised framework for the management and disclosure of nature-related financial risks. Having published the third version of its beta framework in November 2022, it has now released its fourth and final draft.
The framework’s development has been supported by over 1,000 market participants from over 150 countries and territories. With this extensive stakeholder engagement, the TNFD has been able to test and refine its approach.
Its latest draft brings some minor amendments but is based on the same core concepts, definitions and alignment with the TCFD. Although few actual changes have been made, the fourth draft stands out for its categorisation of disclosure metrics.
A tiered approach has been proposed, in an attempt to create a balance between the recommendations of the scientific community and the practical ability of market participants. The method is expected to help investors draw comparisons between organisations, while also acknowledging the variations between different sectors and business models.
Essentially, the desired disclosure metrics have been separated into three groups. At the most basic level, disclosing organisations will be expected to report on a set of Core Global Disclosure Metrics that are relevant to a broad range of industries and are reflected in global policy. The next tier introduces a group of Core Sector Disclosure Metrics, which will support stakeholders in making comparable assessments between businesses operating within the same sector. Finally, organisations may disclose Additional Metrics that are specifically relevant to their individual operations.
Alongside its proposed framework, the TNFD has released drafted guidance on the use of scenario analysis when considering nature-related issues and how companies should engage with affected stakeholders. It has also published its intended advice on how the framework may be implemented by four key industrial sectors, as well as instructions for its application in four separate biomes.
The fourth beta framework will now be subjected to a concluding consultation period running from 30 March to 1 June 2023. Feedback will be considered, allowing the TNFD to make any remaining changes before the September release of its final recommendations.
Timely launch comes in response to growing demand
The TNFD’s framework is expected to fill an important gap within corporate sustainability disclosure. Although the TFCD has played a key role in mainstreaming the voluntary disclosure of climate-related financial risks, the lack of data available on nature-related issues has left stakeholders unable to fully comprehend the environmental risk exposure of corporate operations.
Given that climate change and nature are inextricably linked, the disclosure of carbon emissions alone simply does not suffice. It fails to capture the impacts of climate change on natural ecosystems and the vital services they provide.
For companies and their stakeholders, this is a major cause for concern. With more than half of the world’s GDP being fully or largely dependent on nature, businesses that fail to effectively manage their activities may be highly exposed to serious material risks. In addition to the financial impacts of ecosystem collapse, they may also fall victim to reputational damage or legal penalties.
Recognising the severe implications of nature-related risks, the global financial community is actively working to reduce its exposure. Investors are calling for opportunities that align with nature-related goals while deliberately avoiding those that fail to meet their changing expectations.
Without clear and transparent data, however, these decisions are difficult to make. Investors are struggling to make reliable comparisons between different companies, rendering it impossible for them to hold businesses accountable or channel their capital towards more positive outcomes.
The TNFD’s recommendations are expected to address these issues by establishing a consistent approach to the disclosure of nature-related risks. Its latest release comes as a timely response to the rising demands of the investment community.
“These updates should help inform best practice application of the framework, encouraging greater consistency in the use of the framework,” said Charlotte Apps, leader of the Finance for Biodiversity Foundation’s TNFD sub-working group.
“We also welcome the insights shared from some of the pilot tests by corporates. In addition, features such as the updated knowledge bank and tool catalogues, with enhanced features for users, should help to make the TNFD framework more accessible and its application easier for organisations.”
Despite its broad approval, the Foundation’s sub-working group intends to provide further feedback.
Apps explained: “Ahead of the publication of the complete set of recommendations in September 2023, we expect to see further refinements to recommended assessment and disclosure metrics, complemented by additional case studies, to aid the practical application of the framework and consistency of disclosures. We will continue to provide feedback to the TNFD to support these improvements.”
“What we would expect from this last stage of the TNFD framework’s design is to continue to disentangle its approach to metrics, making it ambitious and actionable, and to advance on applicability of the framework for financial institutions, as well as to ensure further convergence with existing and future regulatory standards,” added sub-group member Liumdila Strakodonskaya.
Others plan to make their own contributions to the final framework. Nature Action 100, for example, is working closely with the TNFD to align its goals with investors’ demands corporate action on the destruction of nature.
“Ceres welcomes the release of TNFD’s final beta framework, as we believe standardized disclosure is a key tool for investors to identify a company’s nature-related risks and opportunities. TNFD’s work is a valuable resource that supports Nature Action 100’s aim to spur corporate action on nature loss,” said Julie Nash, senior program director at Ceres, which is co-leader of the initiative’s Secretariat.
“Last week, TNFD’s Executive Director Tony Goldner spoke at Ceres Global about the objectives of the final beta release. The presentation was well received by the audience, which included institutional investors, asset managers and owners, and some of the largest financial institutions in the world.”
“Ceres is working with TNFD to drive investor awareness of the TNFD framework and planning to conduct seminars and meetings with investors on the framework over the next few months. Ceres looks forward to synthesizing the feedback on the framework from the U.S. investor community.””
Voluntary framework is not to be ignored
Although disclosures made against the TNFD’s framework will be voluntary, companies would be ill-advised to ignore its development. If the task force proves as successful as its climate-focused counterpart, then the disclosure of nature-related financial risks will rapidly become the norm.
Furthermore, what begins as a voluntary process for the sake of investors will soon be adopted into the legal requirements of governments around the world. The Global Biodiversity Framework agreed upon in December 2022 included a target for the implementation of nature-related disclosure obligations.
These mandates are to be outlined by signatory parties in the form of national strategies and dedicated action plans. While their requirements may not be a direct replication of the TNFD framework, businesses that familiarise themselves with the practice will undoubtedly be the best prepared.