Taking Action on Nature-Related Risk Management and Disclosures

By Per Thastrom

With the Taskforce on Nature-related Financial Disclosures (TNFD) set to release its final framework in September 2023, companies will soon have concrete guidance on disclosing exposure to nature-related risks and opportunities. However, the recommendations presented in previous versions of the framework, including the v0.4 beta release from this past March, already provide valuable information that organizations can use to guide planning and decision making today.

Background and relationship to TCFD

Societies’ dependency on nature can hardly be overstated. According to the World Economic Forum and PwC (2020), more than half of the world’s economic output is moderately or highly dependent on nature, and thus exposed to nature-related risks. The TNFD is a global initiative that began in 2020 with the goal of delivering a risk management and disclosure framework to help firms report and act on those risks. The Taskforce represents global financial institutions, corporates, and market service providers, and is funded by governments, the UN, and major philanthropic organizations.

The TNFD is modeled on the Taskforce on Climate-related Financial Disclosures (TCFD) but focuses on risk management related to natural assets and ecosystem services rather than climate change. Though nature and climate are closely linked, the latter term refers to long-term weather patterns while the former encompasses the totality of biological systems (including people) and their interactions. Changes in climate can have direct and indirect impacts on nature, and nature in turn can influence climate through mechanisms like photosynthesis and carbon sequestration. It is important to note that the TCFD and TNFD frameworks seek to complement one another rather than compete. In overlapping areas where the TCFD has already provided recommendations, the TNFD refers to these.

In its most recent annual report on global risks, the World Economic Forum used results from surveys of leaders in government, academia, and the private sector to rank the severity of immediate and long-term risks to humanity. Nature-related risks loom large, with respondents ranking “biodiversity loss and ecosystem collapse” and “natural resource crises” as the fourth and sixth most severe risks, respectively, that society will have to contend with in the next decade (WEF, 2023). The top three long-term risks are all related to climate change or natural disaster. As nature-related and interdependent risks evolve, the TNFD will continue to monitor them, and the planned launch of the final framework in September 2023 is likely only the beginning.

Framework elements

The framework intends to provide financial institutions and other firms with the information they need to make better strategic decisions and to strengthen governance and risk management practices pertaining to nature-related risks. Core to the framework are the risk and opportunity assessment approach (LEAP), the recommended disclosures, and the core concepts and definitions. Enclosing the core are data, metrics targets, and scenario guidance. The LEAP approach is illustrated in the graphic below.

The TNFD notes that metrics are most useful when they are comparable across and within sectors. As such, it proposes “core global metrics”, “core sector metrics”, and “additional metrics”. Furthermore, the TNFD has adapted the idea of “scopes” from greenhouse gas emissions (GHG) reporting to capture direct operations, upstream, downstream, and financed activities.

Benefits and challenges of TNFD implementation

Implementing the TNFD framework is likely to improve risk management and decision making, strengthen resilience and adaptive capacity, enhance transparency, clarify accountability, and improve access to capital. However, a number of tactical and strategic challenges need to be addressed.

Implementing the framework requires a combination of business- and risk-specific knowledge, as well as expertise in environmental science, broadly understood. Building the latter takes time, which needs to be accounted for in plans and budgets. An implementation also requires infrastructure support, including access to data and metadata, sufficient analytics capabilities, and the right reporting capabilities.

The purpose of implementing the TNFD framework needs to be aligned with the overall goals of the firm while simultaneously balancing investor, stakeholder, and regulatory expectations. Costs and benefits associated with the implementation will need to be quantified in a business case, which may require assessing intangibles (e.g., reputational capital) and could demand specialized expertise (e.g., valuing ecosystem services). Fortunately, firms don’t have to overcome every single knowledge or technical gap before they can start implementing—and benefitting from—the TNFD framework.

Next steps

The framework offers multiple distinct entry points to nature-related risk management and disclosure. This makes it possible for financial institutions and firms to start small and focus on areas where the impact is likely to be greatest while building capabilities. Though there is no one-size-fits-all approach to implementation, the following actions are likely to have a favorable effort/impact ratio:

Are you ready to take the next step in nature-related risk management and disclosures? Email contact@ficonsulting.com or call us at 571.255.6900.

References:

World Economic Forum [WEF]. (2023). The global risks report 2023: 18th Edition insight report. https://www3.weforum.org/docs/WEF_Global_Risks_Report_2023.pdf

World Economic Forum and PWC. (2020). Nature risk rising. Why the crisis engulfing nature matters for business and the economy. https://www3.weforum.org/docs/WEF_New_Nature_Economy_Report_2020.pdf

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