This article was co-authored with Edward McCombe.
Following in the footsteps of the Taskforce on Climate-related Financial Disclosures (TCFD), the Taskforce on Nature-related Financial Disclosures (TNFD) is preparing an assessment and disclosure framework to be used by business and the finance community to consider the risks and opportunities arising in connection with nature. For the last few years, biodiversity loss has been identified by the World Economic Forum as one of the most severe global risks and increasingly there is seen a need to place a value on biodiversity that has not been historically present in financial reporting frameworks.
The TNFD recently released the second version of its Beta Framework for nature-related risk and opportunity management and disclosure (the TNFD Framework v0.2). This legal update sets out the background context of the TNFD Framework v0.2 and its key features.
Just as the assessment and disclosure of climate change impacts and opportunities has become mainstream across much of corporate Australia, including the settling of associated net-zero or emission reduction targets, we envisage that a similar trajectory will evolve in relation to nature. Companies are therefore well advised to monitor the progress of the TNFD’s work.
The TNFD is a global initiative that was first developed in July 2020 with the backing of 75 members including governments, financial institutions, think tanks and consortiums. The Taskforce formally launched in June 2021, and has since been endorsed and recognised by the G7 and G20 Finance and Environment and Climate Ministers, among others.1
The overarching objective of the TNFD is to address a perceived dearth in publicly available information regarding the impacts of nature loss and associated opportunities for financial institutions and companies.
The TNFD is composed of 34 ‘Taskforce Members’ from 16 countries, each of whom occupy leadership positions in financial and other corporate institutions representing a market capitalisation of over US$3.1 trillion in assets.2 The TNFD remains entirely funded by philanthropic organisations and governments from around the world, including the Australian, British, French and Dutch governments.
The TNFD Framework
The development of the TNFD Framework has been the TNFD’s primary objective and the release of the beta framework represents the culmination of its main body of work to date.
The TNFD Framework in its current form comprises “three core components”:
- An outline of fundamental concepts and definitions for understanding nature that the TNFD recommends market participants use when assessing and disclosing their nature-related risks and opportunities;
- Guidance for corporates and financial institutions to undertake nature-related risk and opportunity assessment and incorporate into their enterprise strategy and risk management processes to inform a range of corporate and capital allocation decisions, including those relating to reporting and disclosure; and
- The TNFD’s draft disclosure recommendations for nature-related risks and opportunities.3
The first version of the TNFD Beta Framework (TNFD Framework v0.1), which was released in March 2022, attracted feedback from over 130 organisations and individuals from 37 countries.4 In response to this feedback, TNFD Framework v0.2 “makes several enhancements [to the three core components] based on market feedback and three significant additions”:
- A first draft architecture for metrics and targets, and draft guidance on, and an illustrative set of, dependency and impact metrics;
- A proposed approach to specific guidance; and
- An update to LEAP-FI [see below for an explanation of LEAP].5
1. Fundamental Concepts and Definitions
The first key component of the TNFD Framework is its outline of definitions and concepts which are intended to educate and assist market participants to frame their understanding and communication when “assessing, managing and disclosing nature-related risks and opportunities”.6
The TNFD’s definitions refer to concepts in nature, including terms such as “natural capital” and “environmental assets”.7 The TNFD also outlines definitions regarding dependencies and impacts, which consider a business’ relationship to environmental assets and ecosystem services. Finally, also defined are the joint concepts of “nature-related risks” and “nature-related opportunities”, which are considered central to the TNFD Framework given their primary role in shaping market participants’ future action.8
The second key component of the TNFD Framework is its “integrated nature-related risk and opportunity assessment process” called ‘LEAP’ (standing for “Locate, Evaluate, Assess, Prepare”). The LEAP model has been developed by the TNFD to assist market participants make “internal nature-related risk and opportunity assessments”.
As the TNFD Framework v0.1 Executive Summary notes, the LEAP approach “involves four core phases of analytic activity”:
- 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 to investors.
Figure 1: TNFD Beta Framework v0.2 LEAP Overview
TNFD Framework v0.2 takes a new approach to nature-related measurement and target setting, including:
- An integrated, overarching architecture for nature-related indicators, metrics and targets, including cross-industry metrics categories;
- Draft guidance and an illustrative set of indicators and metrics for the assessment of nature-related dependencies and impacts to support pilot testing;
- Initial considerations for target-setting.
The second beta version of the TNFD Framework maintains the existing framework of the LEAP model, but adds a “preceding set of scoping questions to help financial institutions prioritise and focus effort as they assess their financial portfolios”.10
Figure 2: TNFD Beta Framework v0.2 Scoping Questions
3. TNFD Draft Disclosure Recommendations
The third key component of the TNFD Framework is its “draft disclosure recommendations”. The 12 draft disclosure recommendations from the first version of the TNFD Framework (which are outlined in Figure 3 below), like the TCFD approach, fell under the four categories of ‘governance’, ‘strategy’, ‘risk management’ and ‘metrics & targets’.
The draft recommendations include “four general requirements that disclosures should be based on”:
- Assessment of nature-related dependencies and nature impacts;
- Consideration of location;
- Consideration of capabilities for nature-related risk and opportunity assessment and management; and
- A statement of the scope of disclosures and what will be covered in future disclosures. 11
Figure 3: TNFD Beta Framework v0.1 draft disclosure recommendations
The key development in TNFD Beta Framework v0.2 is its move towards sector specific disclosure recommendations. Whereas TNFD Beta Framework v0.1 was “sector agnostic” and applies to both financial institutions and corporations, TNFD Beta Framework v0.2 considers disclosure recommendations that will be tailored to both financial and non-financial sectors.12
What is next?
The next version of the TNFD Framework is scheduled to be released in November 2022. As part of the preparation of the third version of the TNFD Framework, the TNFD are prioritising:
- Developing the initial approach to scenarios;
- Continuing to build the approach to metrics and targets, with guidance on risk, opportunity and response Assessment Metrics and initial guidance on targets;
- Developing specific guidance for priority sectors/realms/biomes/nature-related issues, including guidance for financial institutions; and
- Launching and running a Data Catalyst to crowd-in market knowledge and experience developing solutions to nature-related assessment needs and data gaps.13
A fourth beta version of the TNFD Framework is expected to be released in February 2023 before the finalised TNFD Framework (v1.0) is released in September 2023.