By Guy Wilkinson, ESG Analyst, La Française AM
On March 28th 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) released v.0.4 of its beta framework. This is the last beta version, leading up to the first version of the guidance to be released later this year. Nature and biodiversity have been in the limelight for the last few years and the establishment of TNFD in 2021 heralded this surge in interest, along with the two-part COP15 in 2022. Over 190 countries committed to ambitious targets under the Global Biodiversity Framework in Montreal in December 2022, recognising the criticality of nature and biodiversity for the global economy. After all, more than 50% of the global economy is dependent on nature.(1) Although not designed to be mandatory, TNFD guidelines on disclosures are expected to provide a blueprint for nature-related disclosures and assessment frameworks. We can also expect TNFD disclosures to be ultimately made mandatory by regulators over the years, as has happened with TCFD (Taskforce on Climate-related Financial Disclosures) on climate.
What is the TNFD?
The TNFD is a global, market led initiative that seeks to develop a framework for the disclosure and risk management of developing nature-related risks, opportunities, impacts and dependencies. It was launched in 2021 with the goal of moving financial flows towards nature positive outcomes and away from nature-negative outcomes through standardised disclosures. The taskforce currently has over 40 members including corporates and financial institutions representing $20 trillion in Assets Under Management. There are also 1,000 organisations globally supporting the TNFD Forum, with 18 core knowledge partners representing global scientific, conservation and standards development organisations. (2)
What has changed between v.0.3 and v.0.4?
Whilst the main structure and components of the framework are similar to the previous release, there are now 14 TNFD recommendations, of which 11 are directly adapted to the commonly used TCFD framework for climate. The 3 new additions are on the Risk Management and Strategy pillars, with an emphasis on stakeholder engagement, value chain and location specificity – topics that are specifically important in the context of nature. This is a significant change from TCFD where these details are not as well specified.
This is also the first release to include guidance on data & metrics and sector-specific guidance frameworks. TNFD has provided a first set of metrics that can be used for nature-related disclosures. These are divided into three tiers: core global metrics that apply to all sectors, core sector metrics that apply to certain sectors and additional disclosure metrics, which are recommended but not required. Examples of core global disclosure metrics include: extent of land/freshwater/ocean use changes by ecosystem type and business activity; total pollutants released into the soil split by type; and, total non-GHG air pollutants by type. In this version, TNFD has also provided sector-specific guidance for Food & Agriculture and Financial Institutions, which includes additional draft disclosure guidance, as well as additional guidance on biomes.
What can still be improved?
There are still areas of the draft disclosure which we believe can be improved. For example, there is potentially too much freedom with scoping. Given that the level of discretion allowed for organisations to determine materiality and scope of their analysis is broad, it is plausible that companies in the same sector have significantly different levels of disclosure.
Although TNFD has provided a set of tools, such as ENCORE, which make disclosures a lot easier, we still believe the set of core metrics is still not applicable for all sectors. From a financial institution (FI) perspective, it is highly unlikely that an FI will be able to report and disclose on all 14 Core Global Disclosure Metrics, simply due to a lack of scope and reported data (for Scope 3). For example, soil pollution, to be disclosed as ‘Total pollutants to soil split by type’ is often not a readily available data point and companies in sectors which do have a high exposure to soil pollution will need time and resources to start reporting it. There is also the danger that FIs could be pigeon-holed into using one methodology or data source to comply with standards and regulations until there is consensus on the best way to describe impacts and dependencies.
The final release will be issued in September 2023. Nevertheless, we believe that it is important for market participants to be proactive and to start integrating the TNFD framework now. There is increasing focus on a nature-positive transition, combined with the net-zero transition too, and where focus starts to tilt, regulation will likely follow.
This commentary is provided for informational and educational purposes only. The opinions expressed by La Française Group. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.