We tend to think of nature as free, but it’s not.
March 16, 2022 in Insurance and risk
By encouraging organizations to understand their impact and dependencies on nature, the Taskforce on Nature-related Financial Disclosures (TNFD) aims to embed the analysis of nature-related risks and opportunities at the heart of making corporate and financial decision-making, with the ultimate goal of shifting the flow of global capital to outcomes that can benefit, rather than harm, nature
We tend to think of nature as free, but it’s not.
With more than half of the world’s economic output dependent on nature, any damage or loss to oceans, rivers, lakes, land, atmosphere and living things comes at a cost.1.
Nature degradation and biodiversity loss affect the resources, supply chains and wealth of communities, diminishing the value of assets and investments and leading to considerable financial risks. Conversely, it is estimated that the transition to a nature-friendly economy will create around 400 million new jobs and generate $10 trillion in annual business value.2. Investors want to better understand these risks and opportunities in order to identify their own exposure and make decisions about the destination of their capital.
The Task Force on Nature-Related Financial Disclosures (TNFD) is a global, market-led, science-based, government-backed initiative that was created in response to the growing awareness that, while like the climate, nature should be taken into account in financial factors and business decisions3. However, unlike climate change, where the universal measure is the GHG equivalent, nature is more multifaceted and biodiversity loss can vary widely by location.
TNFD today released the first beta of a Nature Risk Management and Disclosure Framework to accelerate the conversation about the relationship between business and nature. This is a prototype that does not yet include all aspects of a fully developed framework. It encourages a wide range of market participants including corporations, financial institutions, asset managers, insurers, investors, analysts, regulators, exchanges and market service providers to better understand the impact of their activities on nature, as well as nature on their activities. . They encourage everyone to get involved in the debate on how nature-related risks and opportunities can be factored into business and investment decisions and disclosed effectively.
The documents released today are working papers and initiate an 18-month feedback and pilot testing phase with market participants. TNFD plans to release subsequent versions through 2022 and 2023 before launching the final framework in late 2023.
The ultimate goal is to support a shift in global financial flows towards activities that support and protect nature (resulting in positive outcomes for nature) and away from activities that cause harm. They will do this by supporting a better understanding of the issues, helping companies understand their risks and opportunities, and providing guidance on how to disclose effectively.
Complete existing ESG reporting
The global sustainability and ESG reporting landscape is changing rapidly. The draft TNFD framework is released within an already complex landscape of reporting frameworks. However, it represents an important development in this landscape.
The mission, concept and structure of the TNFD follow those of the Taskforce on Climate-related Financial Disclosure (TCFD). This initiative has resulted in significant improvements in understanding and communicating the impact of climate on business resilience and financial performance. TNFD aims to create the same impact on nature-related relationships. By following a consistent structure and helping companies link their information on climate and nature-related risks and opportunities, the two frameworks should be complementary.
The TCFD was also an important precursor to the International Sustainability Standards Board (ISSB), a new global standard setter formed by the IFRS Foundation at COP26 in November 2021. Future ISSB standards are expected to follow a structure consistent with the TCFD and therefore also now the draft framework of the TNFD. Before the ISSB publishes its own standard on nature-related disclosure, the TNFD publications can provide useful guidance for companies that want to move forward in disclosing how nature affects and is affected by their activities.
Embracing “natural capital”
We took nature for granted for too long, until it was almost too late. Nature is essential for all of us. We cannot expand beyond our planetary boundaries, so our economies must grow in harmony with nature. If the world is to meet climate goals, a step change is needed to integrate nature into business and financial decisions, not least because nature loss and climate change are two sides of the same coin. The TNFD is a major global initiative to harness the role of finance more effectively and meaningfully to embed the value of nature in a systemic, market-led framework to integrate a nature-friendly economy. The hope now is for business and finance to try and test the beta framework, provide feedback, contribute to its development, and help it thrive.
Nature is increasingly on the agendas of investors and regulators. Capital has traditionally been thought of only as money, but capital describes any resource or asset that stores or provides value to people and the economy. Natural capital is a way of thinking about nature in much the same way as traditional capital – if we invest in it, it creates value, and if we degrade it, we limit its value. It’s time for companies to embrace this concept and commit to what TNFD is trying to do.
Get involved – the TNFD documents are designed to help market participants identify how they are exposed and prepare to start reporting on their exposure to nature-related risks in value chains and investment portfolios . The aim is also to seize the opportunity offered by nature to transform and sustain business models, supply chains, products, services, and establish internal metrics, targets and reporting processes.
By applying the new TNFD framework, users can begin to value nature in the same way as traditional capital, and equip businesses, asset managers, and insurers to make better nature-friendly decisions.
A more comprehensive review of the TNFD Beta Framework Update will be released soon by KPMG.
Half of the world’s GDP is moderately or highly dependent on natureWEF, January 19, 2020
How our economy could become more “nature-positive”WEF, February 14, 2022
Nature-Related Financial Disclosures Working Group