Everything You Need To Know The Taskforce on Nature-related Financial Disclosures (TNFD)

‘Nature’ and ‘biodiversity’ have until recently been relegated to the shadows of greenhouse gas emissions in the climate change conversation. However, they have now become inevitable truths owing to scientific and political effort. Understanding and mitigating negative impacts of human activity on ‘nature’ is critical to maintaining safe conditions for species to coexist. While maintaining ecological balance is a more than adequate reason to guard against negative impacts on nature, the World Economic Forum has also estimated that “approximately $44 trillion of economic value generation is moderately or highly dependent on nature”, which is more than half the global GDP. Concerted policy and innovation is required to mitigate nature related risks, and in recognition of this, almost all ESG mature economies world-over are rapidly progressing towards nature-based disclosures and solutions.

The TNFD:

Leading disclosure related policy work on this front is the Taskforce on Nature-related Financial Disclosures (the TNFD). Modelled after its immensely successful predecessor, the Taskforce on Climate-related Financial Disclosures (the TCFD), the TNFD was announced in July, 2020 by the United Nations Environment Programme Finance Initiative (UNEP FI), the United Nations Development Programme (UNDP), the World Wildlife Fund (WWF) and Global Canopy. The TNFD was set up by an Informal Working Group (IWG), established in September 2020, comprising 74 financial institutions, regulators, corporates (including YES Bank Limited, India). In June 2021, the TNFD was formally launched in Paris with the appointment of two Co-Chairs: Elizabeth Maruma Mrema, Executive Secretary of the UN Convention on Biological Diversity, and David Craig, CEO of Refinitiv and Group Leader at LSEG.

The TNFD released pilot versions of its framework in March and June 2022, which were tested by 250 global financial institutions and corporates through an "open innovation approach". The final TNFD Recommendations were released in September 2023, providing a risk management and disclosure framework for organisations to report on nature-related risks and opportunities.

The TNFD’s recommendations:

Currently, 320 enterprises (including seven Indian enterprises) representing US$4 trillion in market capitalisation have committed to making nature-related disclosures based on the TNFD’s Recommendations. ‘Nature’ in this context relates to the natural world especially including biodiversity and their interactions with each other and their environments. The ‘natural world’ has been specifically defined as comprising four realms that are critical for human existence - land, ocean, freshwater and the atmosphere.

Source: TNFD Recommendations

The TNFD specifies five primary causes for nature-change resulting from human activity:

1. Climate change - measured as GHG emissions
2. Land/ freshwater/ ocean use change - Degradation of environmental asset quality (e.g. increase in intensity of use), rewilding/ restoration/ conservation efforts
3. Resource use - water withdrawal and consumption from areas of scarcity, high-risk natural commodities sourced from land/ ocean/ freshwater  
4. Pollution - from pesticides, wastewater discharge, waste generation and disposal, plastic, non-GHG pollutants (e.g. particulate matter, Nitrogen Oxides, Sulphur Oxides, Ammonia)
5. Invasive alien species introduction/ removal - negative impacts caused by a decrease in stock and diversity of native species (e.g. habitat destruction of tigers and elephants in the Western Ghats of India caused by proliferation of invasive species like the senna tree and the lantana camara)

The TNFD’s work is built on seven principles: 

1. Market usability - Usable by and valuable to TNFD committers and other stakeholders
2. Science-based - Evidenced by science, converging towards extant science-based initiatives
3. Nature-related risks - incorporate (i) immediate and material financial risks, (ii) nature-related dependencies, and (iii) impact of activities on nature and related organisational and societal risks
4. Purpose-driven - Proactive risk-mitigation and enhancing nature-positive action
5. Integrated and adaptive - Interoperable with existing frameworks, adaptive to international and national policy commitments, standards and market conditions
6. Climate-nature nexus - Integrating climate and nature related risks, increasing budget allocation to nature-based solutions
7. Globally inclusive - Relevant and accessible to emerging and developed markets both

The LEAP Approach:

The crux of the TNFD is in the LEAP approach it has recommended:

TNFD for financial services: Using the LEAP, Grant Thornton, April 2022

Below is a detailed breakdown of each of the stages of the LEAP approach:

LEAP Approach, Stage 1: Locate

Locate the interfaces with nature across geographies, sectors and value chains: 

• Business footprint: Direct assets and operations, related value-chain activities
• Nature interface: Biomes and activities interfaced with, integrity and importance of the ecosystems
• Priority location identification: For instance low integrity, high biodiversity areas, or drought-prone areas
• Sector identification: Sectors, business units, value chains and asset classes interfacing with nature in priority locations

LEAP Approach, Stage 2: Evaluate

Evaluate dependencies and impacts on nature: The TNFD defines nature-related ‘dependencies’ and ‘impacts’. The former relates to operational/ functional reliance of an enterprise on ecosystem services (pollination, soil quality, access to running water). The latter relates to both negative and positive changes in nature’s capacity to provide social and economic functions, caused directly, indirectly or cumulatively by an enterprise.

Enterprises will have to evaluate:

1. Relevant environmental assets and ecosystem services

2. Business process and activities at priority locations, impact and dependency on environmental assets and ecosystem services

3. Dependencies and impact: Across business at priority locations

4. Dependency analysis: Size and scale of dependencies in priority locations; Impact analysis: Size and scale of impacts in priority locations

LEAP Approach, Stage 3: Assess

Assess nature-related risks and opportunities to your organisation

1. Risk identification and assessment: Corresponding risks to organisation; Existing risk mitigation and management

2. Additional risk mitigation and management

3. Materiality assessment for TNFD disclosure

4. Nature-related opportunity identification and assessment

The TNFD recognises three types of interlinked risks

• Physical risks - Nature-related physical risks arise as a result of changes in the biotic (living) and abiotic (non-living) conditions that support functioning ecosystems. Addressing these requires an understanding of biological, scientific and other processes involved in the ecosystem service provision. These can be acute (e.g. increase in incidence of and negative impact caused by cyclones due to loss of coastal protection), chronic (decline in crop yield due to endangerment of pollinators), or both. 

1. Acute: Occurrence of short-term, specific events that change the state of nature. For example, risks caused due to oil spills, forest fires, or pests affecting a harvest. 

2. Chronic: Gradual changes to the state of nature. For example, a decline in crop yield due to endangerment of pollinators or poor soil quality caused by fertiliser use

• Transition risks - resulting from incompatibility between an enterprise’s strategy and the evolving landscape within which it operates (e.g. disruption caused by policy, innovation, market changes, user behaviour changes)
• Systemic risks - ecosystem collapse caused by failure of a critical system, aggregated risk caused by impact to one or more sectors in a portfolio (financial or corporate), and contagion (financial difficulties posed to financial institutions spilling over to the broader financial system)

The TNFD also identifies clear pathways to realise nature-related opportunities. These are defined as “activities that create positive outcomes for organisations and nature through positive impacts or mitigation of negative impacts on nature”. Broadly, the TNFD has framed these as two non-exclusive categories -

Opportunities in business performance:

• Changing markets - access to new markets and geographies, changes in customer behaviour and investor sentiment
• Capital flow and financing - access to capital markets and reduced cost of capital 
• Resource efficiency - reducing dependency, improving operational efficiency at reduced costs
• Products and services - that protect, manage or restore nature
• Reputational capital - inflow caused by changes in stakeholder perception 

Opportunities in sustainable performance:

• Sustainable use of natural resources, including substitution of natural resources with recycled, regenerative, renewable or responsibly sourced input material
• Ecosystem protection, restoration and regeneration within and outside an enterprise’s direct control

The TNFD has introduced a ‘mitigation hierarchy’ In responding to nature-related risks and opportunities, in line with principles such as the SBTN AR3T framework: 

• Avoid: Prevent or eliminate negative impacts entirely
• Reduce: The negative impacts that cannot be eliminated
• Restore: Initiate or accelerate the recovery of an ecosystem to have permanent impact
• Regenerate: Increase productivity / biophysical function of existing land/ocean/freshwater uses 
• Transform: Contribute to requisite systemic change

LEAP Approach, Stage 4: Prepare

Prepare to respond to nature-related risks and opportunities, including reporting on material nature-related issues to the primary users of financial reports and other stakeholders, aligned with the TNFD’s recommended disclosures

1. Strategy and resource allocation 

2. Target setting and progress measurement

3. Disclosures in line with TNFD recommendations

4. Presentation of nature-related disclosures

Our observations: 

Over the past year, we have conducted market research (primary research) in the EU, the UK, the US and Singapore. We have found that nature-related disclosures are increasingly taking centre-stage, with the EU being furthest ahead in this process on account of ESRS E4 (biodiversity and ecosystems) being in force. The TNFD has also published a mapping of ESRS to TNFD, demonstrating this. Similarly, GRI’s updated biodiversity standards (101) are highly compatible with the TNFD recommendations, and both organisations are collaborating to ensure interoperability and strengthening of disclosures. 

Any enterprise based in the EU or having significant operations in the EU will have to take proactive measures to have their nature-related disclosures in place. Similarly, we are finding that Singapore is a leader in the ESG policy space, with high likelihood of adopting the TNFD. Globally, Japan has a strong lead in terms of TNFD adopters, with 109 being headquartered in Japan. The UK is second at 58 adopters, followed by France and Taiwan at 20 each, and the US at 17.

The TNFD has announced today that there has in fact been a 30% increase in TNFD adopters since January, with 96 organisations joining the initiative bringing the total number to 416. This represents $6 trillion in market capitalisation. The 114 financial institutions registered as adopters cumulatively represent $15.9 trillion in assets under management. Successful global adoption mirroring the TCFD seems inevitable.

The TNFD itself is incredibly proactive, with a highly informative website which serves as a self-sufficient guide to navigate the TNFD. The TNFD also organises periodic workshops and webinars, including by adopters that walk the audience through the process of compliance. Based on these, we understand that early adopters will have a significant advantage in the imminent global roll-out of the TNFD - disclosures are currently on a best-effort and continuous improvement basis, and organisations are putting the requisite data systems in place to adopt the LEAP approach. Solutions in the space are very nascent and quickly evolving - it is clear that cross-stakeholder collaboration will be critical for developing robust databases and methodologies (e.g. geographically bounded species indices, quantification of impact on these species and vice versa will require academia, governments, technology solution providers to collaborate). 

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