TNFD: WHAT IS IT AND CAN YOU PREPARE?
The framework for the Taskforce for Nature-related Financial Disclosures (TNFD) is due to be finalised this year. Alex Wilson, senior consultant at Superunion, considers what this means for businesses.
Nature is integral to the functioning of the economy, with over 50% of global economic output moderately or highly dependent on it. Despite this, many companies don’t have sufficient information to understand how nature affects their business’ financial performance.
The Taskforce for Nature-related Financial Disclosures (TNFD), a risk management and disclosure framework established in 2021, aims to correct this by providing recommendations for nature related disclosures. Its intention is to shift financial flows away from activities that are harmful to nature and towards those that support it.
With the TNFD framework due to be finalised this year and the latest COP15 Biodiversity conference complete, we have set out below what the nature-related business and reporting implications may be for 2023 and beyond.
How are businesses affected by nature?
The extent to which businesses are affected by nature varies from sector to sector, this exposure is due to heavy reliance on resource extraction. Policy decisions such as the recent EU ban on importing products tied to deforestation will only exacerbate the ecological threats to these businesses.
It's not only these businesses that will be affected. Hidden dependencies on nature exist along many supply chains. A study by the World Economic Forum (WEF) showed that despite industries like aviation, real estate and mining all scoring low in terms of direct reliance on ecosystems they were highly dependent when it came to their supply chains.
Financial institutions may also start to feel the pressure, given increasing investor demand for greater transparency over investments. These companies invest in a diverse range of assets that may depend on or be harmful to nature. In the UK alone, more than £300bn of pension fund investments are tied to financial institutions and businesses at high risk of causing deforestation. As biodiversity is brought into the limelight with events like COP15, there is likely to be increased public scrutiny around the impact these funds are having on nature.
Breaking down TNFD
The TNFD will assist companies in responding to this increased scrutiny. The framework is based on the same four pillars as the Taskforce for Climate-related Financial Disclosures (TCFD); governance, strategy, risk management, and metrics and targets.
As per the TCFD, the TNFD divides nature-related risks into physical and transitional risks. Physical risks are those which result from climatic events, such as floods, hurricanes and wildfires. Transitional risks are those related to policy action, such as the introduction of regulations to transition the economy away from fossil fuels.
Given the lack of information at a corporate level surrounding the impact of nature on businesses, the TNFD has produced accessible guidance in the form of LEAP, an integrated assessment process aimed at supporting companies in managing their nature-related risks and opportunities. LEAP stands for:
Locate your interface with nature
Evaluate your dependencies and impacts
Assess your risks and opportunities; and
Prepare to respond to nature-related risks and opportunities and report
The complete set of TNFD recommendations are due to be released in September 2023, with the latest draft version released in November 2022. The TNFD intends to align with the target of no net-loss of biodiversity by 2030 and net-gains by 2050.
How to prepare for TNFD:
- Start by thinking about which nature related risks and opportunities impact your business. Consider whether those identified under the TCFD can be extended out to incorporate nature
- Use the LEAP assessment process as a starting point for managing your nature-related risks and opportunities
- Allocate a member of management or the board to take charge of nature-related disclosures
- Familiarise yourself with the most up to date version (V.03) of TNFD and subsequent amendments (due March 2023)
- Conduct a high-level materiality assessment, approaching stakeholders to understand their nature-related