The Taskforce on Nature-related Financial Disclosures (“TNFD”) released its final recommendations during New York Climate Week, on 19 September 2023. Now is the time to get ahead, with mandatory reporting expected in the future.
The framework and its recommendations are the culmination of nearly two years of work, building on the Kunming-Montreal Global Biodiversity Framework and the Taskforce for Climate-related Financial Disclosures (“TCFD”), in close co-operation with stakeholders including the IPCC, CBD, and OECD.
TNFD, much like TCFD
The framework is expected to set the global standard for reporting on nature and biodiversity, and to be quickly integrated into the patchwork of reporting requirements already applicable to corporates and financial institutions. While nature poses some specific reporting challenges, the TNFD has been designed to fit alongside existing disclosure approaches, to encourage adoption and moderate the costs of compliance.
Like its climate counterpart, adoption of the TNFD framework will initially be voluntary but reporting is expected to become mandatory in due course. Investor expectation is likely to precede mandatory compliance, with the Investment Association having engaged throughout the TNFD framework development process, suggesting that TNFD implementation may soon be included in the substance of investor guidelines and required by institutional investors.
Additionally, the TNFD adopts the same reporting structure as the TCFD, which should make implementing the TNFD framework a more familiar process. While similarities to the TCFD will be reassuring to those familiar with the TCFD framework, the TNFD introduces a new challenge: disclosures on nature and biodiversity require reporting businesses to familiarise themselves with a subject matter that – even more so than climate – is place and sector-specific and relies on data that are in many cases difficult to collect and quantify.
Fortunately, the TNFD recognises that its subject matter will be new ground for many and has designed the framework to complement existing reporting processes and maximise early adoption:
- Building on the TCFD – like the TCFD, the TNFD framework includes 14 recommendations based on: (i) governance, (ii) strategy, (iii) risk and impact management, and (iv) metrics and targets.
- The LEAP approach – the TNFD adopts a straightforward adoption mechanism to guide companies’ engagement with the requirements of the framework:
- Locating their interfaces with nature;
- Evaluating their dependencies and impacts;
- Assessing their risks and opportunities; and
- Preparing to respond and report.
- Consistency with existing frameworks – the TNFD worked closely with multiple existing disclosure frameworks, including IFRS S1 and S2 (discussed further in our latest blog on the ISSB draft standards) and the GRI standards, to align their approach. This ensures that the TCFD recommendations can be adopted by standard setters worldwide and that reporting entities may be able to comply with the resulting standards by adapting existing processes rather than starting from scratch.
One material deviation from the approach of the TCFD is that the TNFD framework is agnostic about materiality standards and accommodates single materiality or double materiality, accounting for both impact materiality and financial materiality. This makes it interoperable with double materiality regimes like the EU’s Corporate Sustainability Reporting Directive (“CSRD”) as well as regimes based on single materiality, and allows reporting entities to select which is best for them, based on their values, investors and regulatory context.
The TNFD also introduces three, new nature-specific recommended disclosures, not included in the TCFD: (i) engagement with local and indigenous communities – an area of increasing focus, featured in the latest OECD Guidelines on Responsible Business Conduct and draft Corporate Sustainability Due Diligence Directive, (ii) assessment of sensitive locations, and (iii) evaluation of value chains. These are all highly nature oriented and integral to the new framework, which otherwise mirrors the TCFD closely.
The data challenge
One of the key difficulties with nature-related financial disclosures is that there is far less agreement on what kind of qualitative and quantitative data needs to be disclosed to provide useful and comparable disclosures. To address this, the TNFD introduces 14 new ‘indicators’ and ‘metrics’ – narrowed down from over 3,000 identified initially – broken down into nine for dependencies and impacts and five for risks and opportunities. These are to be used by companies in assessing their disclosure obligations.
At the launch this week, the TNFD issued core sector metrics for those sectors that it regards as most exposed to nature-related impacts, including food, apparel and textiles, and construction. These have been issued in draft and are now out for consultation until the end of November 2023.
Alongside the core sector metrics, the TNFD has published global metrics for financial institutions. Initially, their reporting will be focused on the five risk and opportunity metrics, but as TNFD is adopted by companies, they will also be able to adopt and include dependency and impact indicators in their reporting. Specific biome guidance is expected in 2024.
Getting ahead - implementing the TNFD framework in your organisation
The resounding message from the TNFD at and around the launch of the framework was that every business is reliant on natural services – be that directly or through their supply chains – and that every business faces nature-related risk and opportunity. The TNFD aims to equip businesses, investors and societies with the tools and knowledge to understand their nature impact and dependencies and to respond accordingly.
Governments, including the European Commission, will be assessing the framework in advance of potential adoption into their own sustainability reporting regimes. In the meantime, there is nothing stopping corporates and financial institutions from reporting in line with the framework voluntarily. Indeed, for many organisations nature will already form part of their climate reporting and consideration of their human rights impacts. With mandatory reporting on the horizon, businesses that engage with the framework sooner rather than later are likely to find themselves in a better position both in terms of integrating reporting into their existing processes and preparing for compliance.
The TNFD has taken various steps to allow businesses to start engaging at an early stage and have made clear that perfect should not be the enemy of the good when it comes to getting started with nature-related reporting. Crucially, it has included case studies, worked examples and scenario analysis in its guidance. These are designed to allow companies that might be starting out to familiarise themselves with the framework and how others have tackled it, which is further explored in the free TNFD membership forum.