TNFD publishes final recommendations for nature-related risk management and disclosure

The Taskforce on Nature-related Financial Disclosures (TNFD) has published the final version of its recommendations on a framework to identify, assess, manage, and disclose nature-related issues (see press release, executive summary, and full recommendations).

The TNFD aims to do for nature what the Task Force on Climate-related Financial Disclosures (TCFD) did for climate. 

The ultimate aim of the TNFD framework is to “position nature risk alongside financial, operational and climate risk and help to shift capital flows to nature-positive outcomes”. “Nature” encompasses land, ocean, freshwater, and atmosphere – and so goes further than the concept of “biodiversity”.

The publication of the 14 recommended nature disclosures and accompanying guidance marks the culmination of two years of consultations, including pilot testing by over 200 companies and financial institutions.

TNFD Recommendations – why do we need them?

Businesses, the financial sector, governments and regulators globally are increasingly aware that nature-related risks can amount to financial risks.  However, the private sector is struggling to identify, assess, manage and disclose nature-related risks, as well as opportunities. Which is why the TNFD has been developing a global methodology for doing just that.

Nature is deteriorating globally and biodiversity is declining faster than at any time in human history. The majority of the vital ecosystem services on which business and society depend, and which provide the foundation for every economy, are in decline.

Ecosystem services are not being appropriately priced by business and financial markets today. There is growing evidence that this poses risks for businesses, capital providers, financial systems and economies, and that these risks are increasing in severity and frequency.

Critical global supply chains, from agribusiness to semiconductors, are facing disruptions from water shortages and water stress. The degradation of forests is threatening the availability and long-term security of valuable commodities on which some sectors rely, such as construction. The degradation of land and soil has been found to adversely impact the market value of companies and increase credit risk to associated lenders.

In short, this has become a business-critical issue, as is the case with climate change.

TNFD Recommendations – in a nutshell 

The TNFD Recommendations are based on the same four pillars as the TCFD:

• Governance: The governance processes, controls and procedures the organisation uses to monitor and manage nature-related issues;
• Strategy: The approach the organisation uses to manage nature-related issues;
• Risk & Impact Management: The process used by the organisation to identify, assess, prioritise and monitor nature-related dependencies, impacts, risks and opportunities; and
• Metrics & Targets: The metrics and targets used to assess and manage material nature-related dependencies, impacts, risks and opportunities.

Each pillar is accompanied by a set of recommended disclosures, similar to how the TCFD is also structured.

The 14 recommended nature disclosures go beyond the TCFD in incorporating nature-related issues across the realms of nature, in particular adding three new recommended disclosures that are specific to nature. See Figure 20 on p.47 of the TNFD Recommendations for the full set of 14 recommended disclosures.

The TNFD proposes that nature-related disclosures:

• should be integrated with other sustainability-related disclosures (particularly climate) wherever possible to provide users with an integrated, holistic picture of an entity’s financial position and prospects - in particular, the organisation should connect information on nature-related issues that is already included in climate-related disclosures to nature-related disclosures;
• describe the relevant short, medium and long term time horizons, considering the useful life of the organisation’s assets or infrastructure and the fact that nature-related risks and opportunities often manifest themselves over the medium and long term; and
• should be structured to allow entities to get started, building on their climate reporting capabilities over the past decade, and to increase their disclosure ambition over time consistent with Target 15 of the COP15 Global Biodiversity Framework.

Interestingly, the TNFD has decided to tackle the question of materiality (including “double materiality”) head on. Its recommendations are designed to accommodate both financial materiality and impact materiality depending on the relevant jurisdictional requirements that the report preparer is in or the preferences of the report preparer. See pp.41-42 of the TNFD Recommendations:

“The TNFD’s recommendations have been designed to accommodate the different materiality preferences and requirements of a range of report preparers across jurisdictions. The TNFD recommends that organisations apply the ISSB’s approach to identifying information that is material for users of general purpose financial reports as a baseline. Report preparers who want or need to report to a different materiality approach may apply an impact materiality approach to identify information in addition to the ISSB’s baseline. Report preparers should use the definitional guidance regarding materiality provided by the regulatory authorities for their reporting jurisdiction(s). Organisations seeking to align with Target 15 of the Global Biodiversity Framework will want to consider the application of an impact materiality lens to identify information that is incremental to the global baseline.”

“Report preparers should use their jurisdiction’s regulatory approach to materiality. In the absence of such guidance, the TNFD recommends that report preparers:

Provide information consistent with meeting the material information needs of capital providers as a baseline, consistent with the ISSB and the TCFD, with a focus on risk management and how dependencies and impacts on nature create risks and opportunities for an organisation’s financial position; and

Should they need or choose to do so, provide information consistent with meeting the material information needs of stakeholders aligned with a broader materiality approach, reporting against both the ISSB global sustainability reporting baseline and the impact materiality approach of GRI.”

“The TNFD recommends the impact materiality definition from GRI for report preparers who want or need to apply an impact materiality process in the absence of any regulatory guidance that may be relevant to the organisation.”

TNFD guidance 

The TNFD is publishing additional cross-sector guidance to underpin the Recommendations and has released a Discussion Paper on sector disclosure metrics for consultation and is also preparing sector guidance for a range of high nature-impact and high-dependency sectors which will be released in time for COP28.

Materials published thus far consist of:

• Final TNFD Recommendations
• “Getting started” with TNFD guidance
• Guidance on the identification and assessment of nature-related issues (the LEAP approach)
• Guidance for financial institutions
• Guidance for business to understand their impacts and dependencies in different types of ecosystems (known as biomes)
• Guidance on the use of scenario analysis
• Guidance on target-setting, developed with the Science Based Targets Network (SBTN)
• Guidance on engagement with Indigenous Peoples, Local Communities (IPLCs) and affected stakeholders
• Glossary of key terms

See Additional Guidance – TNFD for links to the relevant documents.

Guidance for financial institutions 

The guidance for financial institutions sets out specific guidance for banks, assets managers and owners, and insurers against a number of the 14 recommendations. 

It also sets out two proposed disclosure metrics for financial institutions. The first for sectors considered to have material nature-related dependencies and impacts. The second for sensitive locations. 

The TNFD plans to publish periodic updates to this guidance before publishing a final version in 2024. 

In particular, it welcomes feedback on the disclosure metrics and has noted that it expects further developments on data and methodologies will lead to revisions to the guidance.

See also our our blog post about what the TNFD Recommendations mean for pension schemes in the UK. 

Voluntary adoption of TNFD

As is the case with the TCFD, the TNFD is a global voluntary framework.

Companies including GSK have started to announce their intention to adopt the Recommendations, and the TNFD is anticipating more companies to follow as early as this week, with other companies invited to join the inaugural list of TNFD adopters, which will be announced at the World Economic Forum at Davos in January 2024. The TNFD will track voluntary market adoption of its Recommendations on an annual basis through an annual status update report beginning in 2024.

Legislators and regulators in various countries will also be deciding whether they wish to implement the TNFD Recommendations in their respective jurisdictions. For example, the UK government announced in March this year in its Green Finance Strategy that it will explore in Q4 how the final TNFD Recommendations should be incorporated in the UK.

Interaction with ISSB, the COP15 Global Biodiversity Framework, and CDP

The TNFD Recommendations build on those of the TCFD and are consistent with the global sustainability standards recently published by the International Sustainability Standards Board (ISSB), and the impact materiality approach used by the Global Reporting Initiative (GRI). The TNFD also express the view that the Recommendations will help organisations address emerging regulations such as the EU Corporate Sustainability Reporting Directive (CSRD).

The ISSB has welcomed the high-level of consistency between the TNFD Recommendations and the ISSB Standards and has said it will consider the TNFD’s work when it develops specific nature-related disclosure standards, subject to the outcome of the ISSB’s recent consultation on its future priorities.

The TNFD Recommendations are also aligned with the Kunming-Montreal Global Biodiversity Framework (GBF), which was agreed at COP 15 last year and aims to halt and reverse nature loss by 2030. Target 15 establishes a commitment for the parties to take measures to ensure that large and transnational businesses and financial institutions assess and disclose their nature-related risks, dependencies and impacts. The TNFD Recommendations provide a methodology to help implement Target 15.

The CDP has also announced that it intends to align its global disclosure platform with the TNFD framework from 2024. The CDP already covers certain key elements of nature (forests and water) and so many questions in the CDP questionnaires already align with metrics within the TNFD framework. The TNFD also covers key areas such as oceans, which the CDP has committed to expanding to, alongside all other environmental topics.

Global Nature Data Utility 

The TNFD is exploring how to set up a database of nature-related information, similar to one being planned for climate. 

The TNFD has started a workstream on how to set up a Global Nature Data Utility. It would be a similar concept to the Net Zero Data Public Utility (NZDPU), which aims to be a free-to-use database containing information such as carbon emissions and transition plans. However, it is still being discussed whether the nature version would be free to use or possibly funded by governments.

For more information on Linklaters' nature and biodiversity materials, click here.