Nature for Life Hub
Introduction to Nature, Business and Finance
Task 2: The risks and opportunities that stem from nature
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Welcome
In this task, we will build on this with a focus on the risks and opportunities stemming from nature for businesses and financial institutions. This task also provides an overview of the key elements of the Taskforce on Nature-related Financial Disclosure (TNFD) recommendations and additional guidance, published in September 2023. The TNFD recommendations provide companies and financial institutions of all sizes with a risk management and disclosure framework to identify, assess, manage and, where appropriate, disclose nature-related issues.
Recap on nature-related dependencies & impacts
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Recap on nature-related dependencies & impacts
In the last task, you were introduced to the concepts of dependencies and impacts. Organisations have dependencies and impacts on nature. These give rise to nature-related risks and opportunities. It is essential to evaluate dependencies and impacts on nature to assess the risks and opportunities to an organisation. To recap:
Nature-related impact
Nature-related dependency
Introduction to nature-related risks
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References
Introduction to nature-related risks
It is becoming increasingly clear that market participants can no longer afford to overlook nature loss in economic and financial decision making. It is therefore important that they bring together their dependencies and impacts on nature to be able to assess their exposure to certain nature-related risks. A nature-related risk is a: "potential threat posed to an organisation linked to its and other organisations’ dependencies on nature and nature impacts." There are three main categories of risks:
Transition risk
Physical risk
Systemic risk
Want more? Explore the close relationships between the different forms of risks with "TNFD’s categories of nature-related risk".
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Introduction to nature-related risks: Case studies
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References
Introduction to nature-related risks: Case studies
Taiwan: microchip industry
UK: land degradation
Global: deep-sea mining
Introduction to nature-related opportunities
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References
Introduction to nature-related opportunities
Investing in the solutions to address nature loss will be one of the largest commercial opportunities in our lifetime. This is because nature loss is widespread across economies, with implications for all sectors. Solutions will need to be adopted in a relatively short period of time in order to meet the goals of the Global Biodiversity Framework (GBF). Fundamentally altering economic activity requires new business models. This requires new investments, which brings opportunities. At present, financing with a negative impact on nature and biodiversity far outweighs financing that protects nature, and current levels of biodiversity finance are estimated to be no more than USD 143 billion annually, with 80-85% of this coming from public sources. This does not have to remain the status quo. Understanding nature-related dependencies and nature-related impacts – in addition to other factors such as consumer preferences and regulation – can support strategies for growth and the pursuit of commercial opportunities. Nature-related opportunities are defined as: "activities that create positive outcomes for organisations and nature by avoiding or reducing impact on nature or contributing to its restoration."
Introduction to nature-related opportunities (cont.)
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References
Introduction to nature-related opportunities (cont.)
The World Economic Forum has estimated that US$10.1 trillion could be generated in annual business value by 2030 from taking nature-related opportunities and contributing to the nature-positive transition. They include:
Natural-climate solutions
Nature-based solutions
The concept is grounded in the knowledge that healthy natural and managed ecosystems produce a diverse range of services on which human wellbeing depends.
Want more? Explore the figure "TNFD’s categories of nature-related opportunities".
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Introduction to nature-related opportunities: Case studies
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References
Introduction to nature-related opportunities: Case studies
Israel: precision irrigation
Gabon: forest investment
Mexico: coral reef protection
Mexico: coral reef protection
The concept of materiality
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References
The concept of materiality
All Organizations report information to their stakeholders through formal disclosures. Which information is included within these disclosures is determined by the concept of materiality. Materiality is an accounting principle that acts to guide professional judgment on filtering what information is significant to an organization’s stakeholders, such as investors, and their decision-making, and should therefore be included in formal reporting. As our society, economies and financial systems are embedded in nature, nature-related issues pose material risks for all organizations. For example, the degradation of land and soil has been found to adversely impact the market value of companies and increase credit risk to associated lenders. Central banks and financial supervisors are increasingly recognising nature loss as a source of systemic risk to financial systems and economies. Understanding an organization’s dependencies and impacts on nature is essential to inform a robust understanding of its potentially material risks and opportunities. There are different approaches to applying materiality to nature-related issues between standard-setters, including financial materiality and impact materiality.
Impact materiality
Financial materiality
The concept of materiality (cont.)
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References
The concept of materiality (cont.)
Materiality is one of the most important factors in the development of standards currently being developed around the world. For example:
- The global baseline being developed by the International Standards Sustainability Board (ISSB);
- The European baseline being developed by the European Financial Reporting Advisory Group (EFRAG);
- The expansion and improvement of the Global Reporting Initiative’s (GRI) set of standards;
- National regulation and disclosure standards published by financial regulators around the world including the Standards and Exchange Committee (USA), the Japanese Standards Association (Japan), the Securities and Exchange Board of India (India) and others.
TNFD asks that organisations disclose the approach which they have used, with reference to the relevant standards.
The role and potential benefits of nature-related disclosure
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The role and potential benefits of nature-related disclosure
Disclosure is the foundation of the audit and accounting practices used across the global financial system. Nature-related disclosure, therefore, is a necessary and foundational condition to financial markets to: Sufficiently value and price nature-related dependencies and impacts into their activities; Manage these nature-related issues and be able to act on them. Nature-related financial disclosures should cover all four types of nature-related issue (dependencies, imapcts, risks and opportunties), as well as an organisation’s responses to them.
Nature-related financial disclosures
The role and potential benefits of nature-related disclosure (cont.)
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References
The role and potential benefits of nature-related disclosure (cont.)
Nature loss can also pose risks for financial stability, and poor-quality nature-related financial disclosures can have significant implications for financial markets and supervisory authorities. For example:
- Central banks and financial supervisors, which supervise the safety of financial intermediaries and the stability of the financial system, need high quality, reliable and granular reporting on nature-related risk to carry out their work.
- Securities regulators, who foster investor protection and the promotion of fair, transparent markets, cannot do their job without comparable and comprehensive nature-related disclosure by issuers.
- Governments and policy makers require disclosure in order to meet their national targets for global nature goals, as with those set by the Global Biodiversity Framework (GBF).
It is important to note, however, that nature-related disclosure is insufficient in and of itself to address the nature crisis. It is one of many tools needed to shift the relationship between business, finance and nature and reverse and halt nature loss. This is a whole of society problem that will be solved by coordinated action across many fronts by governments, business, finance and civil society.
Introduction to the TNFD
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Introduction to the TNFD
In September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published a set of disclosure recommendations and guidance for organisations to report and act on evolving nature-related dependencies, impacts, risks and opportunities (nature-related issues).The recommendations and guidance will enable business and finance to integrate nature into decision making, and ultimately support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.
Want more? Explore the figure "The TNFD Recommendations & Additional Guidance".
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Introduction to nature-related disclosures: The four pillars
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References
Introduction to nature-related disclosures: The four pillars
TNFD’s work builds on that of the Task Force on Climate-Related Financial Disclosures (TCFD), and the framework follows the same four-pillar approach to disclosure and has aligned as much as possible with the language of the TCFD. All 11 TCFD recommended disclosures have been incorporated into the TNFD recommendations and three additional recommended disclosures, specific to the nature context, have been added for a total of 14.
Diagram of disclosure recommendations
The four pillars are:
Governance
Strategy
Risk and Impact Management
Metrics and Targets
Introduction to nature-related disclosures: The six key general requirements
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References
The six key general requirements
These disclosure requirements are crosscut by six key general requirements, which must be evidenced in each company’s disclosures:
2. The scope of disclosures
1. The application of materiality
3. The location of nature-related issues
5. The time horizons considered
4. Integration with other sustainability-related disclosures
6. Engagement of indigenous peoples, local communities, and affected stakeholders
The LEAP Approach
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References
The LEAP Approach
The TNFD's LEAP approach is an integrated way of identifying and assessing nature-related dependencies, impacts, risks and opportunities. It aims to help organisations carry out the due diligence needed to inform disclosure statements aligned with the TNFD Recommendations, but it is useful to all organisations, even those who are not reporting.
Diagram of LEAP
The four pillars are:
Want more? Read about this example of the LEAP Application: Ecopetrol
See example
The Global Biodiversity Framework
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References
The Global Biodiversity Framework
The Kunming-Montreal Global Biodiversity Framework is a landmark international agreement which aims to reach a world living in harmony with nature by 2050. It was agreed at the fifteenth Conference of Parties (COP15) to the Convention on Biological Diversity (CBD) in December 2022. It is the successor to the Aichi Targets, set in 2010, which were not successful, and has been hailed as a “Paris moment for nature” after the landmark Paris Agreement on Climate Change adopted in 2015. The headline target is Target 3, which aims to conserve 30% of the world’s land and 30% of its ocean by 2030. However, of most interest to the market is: Other relevant targets include:
- Target 7 to reduce pollution;
- Target 18 on the reform or elimination of harmful subsidies and incentives;
- Target 19 which calls for an increase in financial resources to help resolve the biodiversity crisis.
None of what was agreed in the GBF is legally binding, however many countries have agreed to turn the promises of the framework into action by drawing up national plans for implementation and reporting on these to the CBD. The Global Biodiversity Framework provides the international policy consensus under which TNFD's work sits.
Target 15
The broader financial reporting and regulatory landscape on nature-related issues
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The broader financial reporting and regulatory landscape on nature-related issues
Financial reporting standards
Central Banks & Supervisors
National regulation
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Vulnerability caused by damage to natural capital and a decline in an ecosystem service (for example, pesticides killing insects and a decline in level of pollinators leaving crops to go unpollinated or a dwindling water supply causing shortages for cooling a nuclear power plant, meaning that it may need to be shut down).
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
University of Cambridge Institute for Sustainability Leadership (2022). Nature-related financial risk: use case The EU Farm to Fork Strategy and Fertiliser Companies. available online.
TNFD (2021). Draft recommended disclosures TNFD. available online.
TNFD (2021). Draft recommended disclosures TNFD. available online.
The TNFD's recommended disclosures
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
The University of Cambridge Institute for Sustainability Leadership (2022). Nature-related financial risk: use case. available online. UN Environment Programme’s Sustainable Blue Economy Finance Initiative (UNEP FI SBE) (2022). Harmful Marine Extractives: Understanding the risks & impacts of financing non-renewable extractive industries Deep-Sea Mining. available online. Barbiroglio, E. (2021). No Water No Microchips: What Is Happening In Taiwan? Forbes. available online.
Risks arising from the breakdown of the entire system, rather than the failure of individual parts. Characterised by modest tipping points combining indirectly to produce large failures and cascading interactions of physical and transition risks (contagion), as one loss triggers a chain of others and stops systems from recovering their equilibrium after a shock (for example, the loss of a keystone species such as sea otters, who, upon being hunted to near extinction, upended the structure of coastal ecosystems).
The organisation should consider the relevant short-, medium-, and long-term time horizons, thinking about the useful life of the organisation's assets and infrastructure. It is important to remember that nature-related risks and opportunities are often arise in the medium- or long-term.
Taiwan is the largest manufacturer of microchips in the world, accounting for over 60% of the total foundry industry revenue globally. However, microchip manufacturing is very reliant on high-quality water to cool its systems and rinse away industrial chemicals. One major Taiwanese microchip manufacturer alone uses on average more than 150,000 tons of water per day to maintain operations. Taiwan normally relies on monsoons for its water supply, but a lack of rainfall has caused droughts. Due to the water shortage, Taiwanese microchip manufacturers started relying on water trucks to maintain production. While the Taiwanese government has repeatedly insisted that the global microchip supply chain will not be affected by the drought, the water supply to citizens and businesses was suspended for two days a week in some cities. The water shortage in Taiwan also risked impacting one of the most important links in the world’s tech supply chain and has added pressure to an industry already struggling with a severe microchip shortage due to the Covid-19 pandemic.
TNFD (2023). Definitions of opportunities TNFD. available online.
This will help investors, lenders, insurers and other users of nature-related financial disclosures understand the role an organisation’s board plays in overseeing nature-related risks and opportunities, as well as management’s role in assessing and managing those risks and opportunities.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
The Mesoamerican reef is the largest barrier reef in the Western hemisphere. It is under intense strain from human pressures which mean that it is more difficult to regenerate naturally after hurricanes – which themselves are becoming more frequent and intense due to climate change. This is a problem, as the reef is important for fishing, tourism, and as coastal protection during storm surges. One local community has been able to take out parametric insurance on the reef to help fund conversation efforts after each hurricane. If they can prove that the wind speed reached a certain number, then the insurance pays out. This has joined a trend of other governments insuring their natural assets to secure funding for their conservation.
Target 15 requires governments to: Take legal, administrative or policy measures to encourage and enable business, and in particular to ensure that large and transnational companies and financial institutions: (a) Regularly monitor, assess, and transparently disclose their risks, dependencies and impacts on biodiversity, including with requirements for all large as well as transnational companies and financial institutions along their operations, supply and value chains, and portfolios; (b) Provide information needed to consumers to promote sustainable consumption patterns; (c) Report on compliance with access and benefit-sharing regulations and measures, as applicable; in order to progressively reduce negative impacts on biodiversity, increase positive impacts, reduce biodiversity-related risks to business and financial institutions, and promote actions to ensure sustainable patterns of production.
Financial materiality focuses on how dependencies and impacts on nature create risks and opportunities for an organization’s financial position. The information is aimed to support decision-makers by investors. This is currently the materiality approach standard-setters (International Standard Setters Board) ISSB and the US Securities and Exchange Commission SEC require organizations to apply to their sustainability disclosures.
The TNFD Recommendations & Additional Guidance
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Deep sea mining is the process of collecting mineral deposits from the deep sea, which is defined as the area of ocean below 200m deep. It covers about 65% of the Earth’s surface. There is a growing interest in deep sea mineral deposits, largely due to declining terrestrial mineral deposits needed for important functions in society. So far, the focus has been on exploring this area – no mining activities have yet been carried out.The United Nations Environment Programme highlights the following impacts deep sea mining would have on deep sea ecosystems:
- Loss or reduction in marine biodiversity due to noise or disturbance;
- Loss of ecosystem resilience and provision of ecosystem services due to pollution;
- Loss or degradation of coastal and marine habitats due to dredging or mineral extraction;
- Reduction in animal welfare due to issues such as noise pollution;
- Increases greenhouse gas emissions due to vessels and offshore extraction activity (such as flaring and venting of gas);
- Changes to marine biological, chemical and geological cycles due to pollution or removal of mineral layers from the seabed.
In addition to these, deep-sea mining impacts may disrupt other industries such as fishing, shipping, subsea cables and pharmaceutical/scientific research.Risks faced by those engaging in exploration for deep sea mining include reputational risks due to strong calls from the private sector and civil society for a moratorium on deep-sea mining, a lack of existing regulation means that regulatory changes could suddenly make companies legally liable for their mining activities.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
In addition to the global standards-setting, there are a few countries who have already - or are in the process of – making corporate disclosure on nature mandatory. The key example here is Article 29 in France, which requires all French financial institutions to disclose both biodiversity and climate-related risks and impacts. This law is aligned with the EU Taxonomy, and replaces 2016’s Article 173, which required French investors to disclose their climate-related risks.
The geographic location of an organisation's interfaces with nature affect the organisation's nature-related issues, so should be taken into account.
Investors and other stakeholders need to understand how nature-related risks and opportunities may affect an organisation’s businesses, strategy and financial planning over the short, medium and long term. Such information is used to inform expectations about the future performance of an organisation.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
A nature-related impact is a change in the state of nature, which may result in changes to the capacity of nature to provide social and economic functions (for example, pollution of a river by a factory). These impacts can be positive or negative.
TNFD (2023). LEAP - the risk and opportunity assessment approach TNFD. available online.
A nature-related dependency is an aspect of ecosystem services that an organisation or other actor relies on to function (for example, a reliance on clean water to irrigate crops).
Indigenous Peoples are stewards of 80% of the world's reminaing biodiversity and a source of traditional knowledge about the planet's ecosystems. The organisation should describe its process for engaging with Indigenous Peoples, Local Communities, and affected stakeholders about their concerns and priorities.
Actions to protect, sustainably manage and restore natural or modified ecosystems that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits (for example, creating green roofs and walls in cities can moderate the impacts of heatwaves, capture storm water and abate pollution, as well as help with human physical and mental health).
Impact materiality focusses on whether a company's activities might have a significant impact on the economy, environment and people. Impact materiality takes into account a wider group of stakeholders than financial materiality, and is for the benefit of multiple stakeholders, such as investors, employees, customers, suppliers and local communities. Within the EU Corporate Sustainability Reporting Directive (CSRD), the European Financial Reporting Advisory Group (EFRAG) requires organizations to apply both financial and impact materiality. This approach to materiality is often referred to as double materiality.
In 2022, the World Bank issued the first Wildlife Conservation Bond around black rhinos in South Africa, a brand-new financial instrument, in partnership with private financial institutions Credit Suisse and Citigroup. The instrument will “channel investments to achieve conservation outcomes – measured in this case by an increase in black rhino populations” which are facing severe decline. The bond is worth US$150 million and will be five years long – it is being bought by institutional investors as well as high net worth individuals. This is a model that can be replicated and scaled to other conservation and climate actions and provides an investment opportunity that contributes to a more nature-positive future.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
TNFD (n.d.). Definitions of risks» TNFD. available online.
Syrinx Environmental for BHP (2023). NATURAL CAPITAL ACCOUNTING FOR THE MINING SECTOR BEENUP SITE PILOT CASE STUDY. available online. TNFD (2023). Taskforce on Nature-related Financial Disclosures (TNFD) Recommendations – TNFD. available online. Group, A. | A.C.D. (2023). Grande Mayumba. ACDG | African Conservation Development Group. available online. Gutiérrez, A. (2022). A unique initiative to save Mexico’s coral reef. BBC Reel. available online. PRETORIA (2022). Wildlife Conservation Bond Boosts South Africa’s Efforts to Protect Black Rhinos and Support Local Communities. World Bank. available online.
TNFD (2023). Executive Summary - v0.4 of the TNFD beta framework» TNFD. Available online.
Organisations should describe which approach they are using.
The Global Biodiversity Framework indicates growing momentum around nature-related issues at the international policy level. This can also be seen within the financial regulatory community, for example:
- The Network for Greening the Financial System (NGFS) is a group of over 100 central banks and financial supervisors who formed in 2017 to share and create best practices around green finance at the macroeconomic level. One of their current workstreams headed by the Banque de France and De Nederlandsche Bank (DNB) is on nature-related risks.
- The Sustainable Insurance Forum (SIF) is a global leadership group of insurance supervisors and regulators who are working together on the sustainability challenges facing the insurance sector. They carried out a landmark scoping study on nature-related risks in the insurance sector.
Organisations should describe what activities and assets they are disclosing against, which parts of the TNFD framework they are using, and whether this will change in future. In addition, organisations should also clearly identify information that is relevant to their direct operations, upstream value chains, and downstream value chains.
Investors and other stakeholders need to understand how an organisation measures and monitors its nature-related risks and opportunities. Access to the metrics and targets used by an organisation allows investors and other stakeholders to better assess the organisation’s potential risk-adjusted returns, ability to meet financial obligations, general exposure to nature-related risks and opportunities, and progress in managing or adapting to those risks and opportunities.
A subset of nature-based solutions, natural-climate solutions including conservation, restoration and improved land and sea management that increase carbon storage and/or avoid greenhouse gas emissions, enhance resilience, and assist climate adaptation across global forests, wetlands, mangroves, grasslands and agricultural lands and other habitats (for example, protecting forests as a vital carbon sink for emissions).
TNFD’s categories of nature-related risk
There are close relationships between the different forms of risks. Physical and transition risks can interact and affect economic agents through various channels, before materialising into traditional sources of financial risk (e.g., credit or market risk). For example, organisations can generate acute physical risk by removing coastal marshes, leading to potential damage costs linked to loss of coastal infrastructure from storms. This can also generate a transition risk, specifically policy and legal risk (if that action was illegal) and reputation risk (if it is negatively perceived by consumers). If sufficient organisations in that region remove coastal marshes, then whole regions of industry may suffer from a lack of protection from coastal storms, resulting in systemic risk.
- Enable more informed and robust capital allocation decisions and active ownership strategies. For example, BlackRock and Aviva Investors have both indicated they expect companies to disclose their nature-related risks as part of their investment stewardship guidelines.
- Include nature when evaluating potential and likely impacts on future cash flow and company valuation. For example, Deutsche Bank and Union Bancaire Privée conducted a study to assess and quantify nature-related transition risks for fertiliser companies posed by policies to reduce fertiliser usage in terms of company valuation.
- Inform better corporate strategy, governance and risk management decision making. For example, BHP developed a Natural Capital Accounting approach to estimate the value of natural capital assets and inform its operational strategy, including restoring certain sections of its Beenup mine in Australia.
- Ensure a market participant is complying with relevant standards and regulation in their jurisdiction. For example, Article 29 in France requires all French financial institutions to disclose their climate and nature-related risks.
Agriculture generates up to 29% of total greenhouse gas emissions. Yet in turn, agriculture is extremely sensitive to the negative impacts of climate change. It also relies heavily on water. Moreover, to meet increased food demand as a result of expected global population growth, agriculture yields must become 70% higher over the next 30 years. In response, an Israeli manufacturer of irrigation equipment developed precision irrigation technology to optimise the amount of water and nutrients delivered to each plant. This enables farmers to grow bigger yields using fewer resources. Precision irrigation technology uses 45% less water and can reduce greenhouse gas emissions by up to 85% compared to traditional flood irrigation. The innovative solution also reduces farmers’ dependence on rainfall, lowers energy consumption by 40% and can increase average crop production by up to 55%. For the organisations adopting the technology, as well as saving water, the method can cut consumption of energy and labour leading to large-scale, long-term sustainable savings. The manufacturer received access to new funding mechanisms, attracting over US$50 million in investment from a multilateral organisation in 2020.
Ecopetrol S.A. is the biggest company in Colombia and its largest producer of oil. The company has positioned itself at the forefront of new environmental management frameworks to become a pioneer in the oil and gas sector in Colombia. It applied the TNFD’s LEAP approach in assessing nature-related risks in the Yariguí-Cantagallo oil field under its operation. The main findings from its LEAP assessment are outlined below: Locate: Ecopetrol has access to a significant amount of nature data which has been instrumental in identifying its operations and assets in the study area, identifying the interface with nature and defining high-risk ecosystems by analysing biotic and abiotic factors as well as impacts like water use. Evaluate: The pilot adopted tools like ENCORE, IBAT and WWF's risk filter which have proven very useful for evaluating dependencies and impacts - gaining an overview of the significance of ecosystem services, prioritizing the main dependencies and impacts, and guiding the development of scenarios for associated risks and opportunities. Assess: Risks and opportunities were identified using Ecopetrol’s existing integrated risk management framework and integrating the TNFD’s identification principles. Exposure and magnitude indicators for each risk and opportunity were established to determine their financial implications.
In addition to the work of central banks and supervisors, there are two emerging international reporting standards around climate and nature-related reporting and disclosure. The first is coming from the European Union (EU) - specifically the European Financial Reporting Advisory Group (EFRAG). This builds on EU policy and legislative work including the Green Deal, the Green Taxonomy and investor disclosure requirements for sustainable finance. Upon completion, it will be taken up by the EU Corporate Sustainability Reporting Directive, a new law requiring sustainability disclosure which applies to over 50,000 large European companies. EFRAG is taking a comprehensive approach from the get-go, looking at the interdependence between different environmental, social and governance approaches. The second is a global baseline coming from the recently launched International Standards Sustainability Board (ISSB). ISSB is explicitly starting with climate disclosures, and the primary audience is intended to be investors.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
TNFD (2023). Definitions of opportunities TNFD. available online.
Täger, M. (2021). ‘Double materiality’: what is it and why does it matter? available online. Calace, D. (2020). Double and Dynamic: Understanding the Changing Perspectives on Materiality. available online.
TNFD (2021). Draft recommended disclosures TNFD. available online.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Investors and other stakeholders need to understand how an organisation’s nature-related risks are identified, assessed and managed and whether those processes are integrated into existing risk management processes. Such information supports users of nature-related financial disclosures in evaluating the organisation’s overall risk profile and risk management activities.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
TNFD’s categories of nature-related opportunities
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
The African Conservation Development Group (ACDG) has leased, on a long-term basis, 731,000 hectares of forested and savannah land in Nyanga Province, southern Gabon, for its Grande Mayumba project, with plans to invest $160m into developing commercial activities and infrastructure, alongside preserving one third of the project area as a conservation arc. “Over 25 years, we expect to avoid [around] 200 million tonnes of carbon emissions in the project area, preventing unplanned development, deforestation and degradation of the ecosystem while delivering sustained commercial value,” the company’s website states. The ACDG is also currently making plans around a potential initial public offering that would enable investors to benefit from a future stream of carbon credits, linked to the Grande Mayumba project. It is also exploring launching a securitised bond, fully or partially underpinned by carbon credits. Its work utilises a model that measures the difference in carbon emissions between planned development, which is carefully planned to minimise deforestation, and unplanned development, specifically within so-called ‘high forested, low deforestation’ countries — such as Gabon and its neighbours.
Organisations should ensure that TNFD disclosures are included with other disclosures – and that any conflicts or trade-offs with other risks (e.g.) climate are identified. Nature-related information in climate-related disclosures should also be connected to the relevant nature-related disclosures.
Risks that result from a misalignment between an organisation’s or investor’s strategy and management and the changing regulatory and policy landscape in which it operates (for example, a policy put in place by the EU to reduce harmful fertiliser usage could significantly impact the valuation of a fertiliser company).
In the United Kingdom, farming practises focus on short term crop yields and profit making – this is causing a severe decline in the health of soil. Research has shown that “degrading land poses a material risk to the profitability of those who farm it and, by extension, to those who lend to the farmers.” This is particularly acute when degrading land is impacted by extreme weather events such as storms and floods, which are becoming more common in the United Kingdom due to climate change. Prolonged wet seasons can cause soil erosion leading to unstable riverbanks and changes to the soil pH levels. In addition, valuable soluble nutrients such as nitrogen, potassium and phosphate can diminish in the run-off, setting the stage for poor plant growth. Consequently, farmers working on degraded land are likely to use more fertiliser to help make up the productivity rate, which makes them more vulnerable to price spikes in the fertiliser industry. Evidence suggests that degrading land can suffer a negative impact on yield of up to 40% following an extreme weather event, while average declines are lower, around 5%. It is estimated that 9% of arable land in the United Kingdom is degrading, but this will likely be increased by climate change. This physical risk could then contribute to a systemic risk, as demand for food is forecast to increase by more than 50% between 2010 and 2050.
The TNFD's revised risk and opportunity assessment approach (LEAP)
Journey 18: Task 2
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Transcript
Nature for Life Hub
Introduction to Nature, Business and Finance
Task 2: The risks and opportunities that stem from nature
Start
Welcome
In this task, we will build on this with a focus on the risks and opportunities stemming from nature for businesses and financial institutions. This task also provides an overview of the key elements of the Taskforce on Nature-related Financial Disclosure (TNFD) recommendations and additional guidance, published in September 2023. The TNFD recommendations provide companies and financial institutions of all sizes with a risk management and disclosure framework to identify, assess, manage and, where appropriate, disclose nature-related issues.
Recap on nature-related dependencies & impacts
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Recap on nature-related dependencies & impacts
In the last task, you were introduced to the concepts of dependencies and impacts. Organisations have dependencies and impacts on nature. These give rise to nature-related risks and opportunities. It is essential to evaluate dependencies and impacts on nature to assess the risks and opportunities to an organisation. To recap:
Nature-related impact
Nature-related dependency
Introduction to nature-related risks
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References
Introduction to nature-related risks
It is becoming increasingly clear that market participants can no longer afford to overlook nature loss in economic and financial decision making. It is therefore important that they bring together their dependencies and impacts on nature to be able to assess their exposure to certain nature-related risks. A nature-related risk is a: "potential threat posed to an organisation linked to its and other organisations’ dependencies on nature and nature impacts." There are three main categories of risks:
Transition risk
Physical risk
Systemic risk
Want more? Explore the close relationships between the different forms of risks with "TNFD’s categories of nature-related risk".
See figure
Introduction to nature-related risks: Case studies
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References
Introduction to nature-related risks: Case studies
Taiwan: microchip industry
UK: land degradation
Global: deep-sea mining
Introduction to nature-related opportunities
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References
Introduction to nature-related opportunities
Investing in the solutions to address nature loss will be one of the largest commercial opportunities in our lifetime. This is because nature loss is widespread across economies, with implications for all sectors. Solutions will need to be adopted in a relatively short period of time in order to meet the goals of the Global Biodiversity Framework (GBF). Fundamentally altering economic activity requires new business models. This requires new investments, which brings opportunities. At present, financing with a negative impact on nature and biodiversity far outweighs financing that protects nature, and current levels of biodiversity finance are estimated to be no more than USD 143 billion annually, with 80-85% of this coming from public sources. This does not have to remain the status quo. Understanding nature-related dependencies and nature-related impacts – in addition to other factors such as consumer preferences and regulation – can support strategies for growth and the pursuit of commercial opportunities. Nature-related opportunities are defined as: "activities that create positive outcomes for organisations and nature by avoiding or reducing impact on nature or contributing to its restoration."
Introduction to nature-related opportunities (cont.)
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References
Introduction to nature-related opportunities (cont.)
The World Economic Forum has estimated that US$10.1 trillion could be generated in annual business value by 2030 from taking nature-related opportunities and contributing to the nature-positive transition. They include:
Natural-climate solutions
Nature-based solutions
The concept is grounded in the knowledge that healthy natural and managed ecosystems produce a diverse range of services on which human wellbeing depends.
Want more? Explore the figure "TNFD’s categories of nature-related opportunities".
See figure
Introduction to nature-related opportunities: Case studies
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References
Introduction to nature-related opportunities: Case studies
Israel: precision irrigation
Gabon: forest investment
Mexico: coral reef protection
Mexico: coral reef protection
The concept of materiality
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References
The concept of materiality
All Organizations report information to their stakeholders through formal disclosures. Which information is included within these disclosures is determined by the concept of materiality. Materiality is an accounting principle that acts to guide professional judgment on filtering what information is significant to an organization’s stakeholders, such as investors, and their decision-making, and should therefore be included in formal reporting. As our society, economies and financial systems are embedded in nature, nature-related issues pose material risks for all organizations. For example, the degradation of land and soil has been found to adversely impact the market value of companies and increase credit risk to associated lenders. Central banks and financial supervisors are increasingly recognising nature loss as a source of systemic risk to financial systems and economies. Understanding an organization’s dependencies and impacts on nature is essential to inform a robust understanding of its potentially material risks and opportunities. There are different approaches to applying materiality to nature-related issues between standard-setters, including financial materiality and impact materiality.
Impact materiality
Financial materiality
The concept of materiality (cont.)
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References
The concept of materiality (cont.)
Materiality is one of the most important factors in the development of standards currently being developed around the world. For example:
- The global baseline being developed by the International Standards Sustainability Board (ISSB);
- The European baseline being developed by the European Financial Reporting Advisory Group (EFRAG);
- The expansion and improvement of the Global Reporting Initiative’s (GRI) set of standards;
- National regulation and disclosure standards published by financial regulators around the world including the Standards and Exchange Committee (USA), the Japanese Standards Association (Japan), the Securities and Exchange Board of India (India) and others.
TNFD asks that organisations disclose the approach which they have used, with reference to the relevant standards.The role and potential benefits of nature-related disclosure
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The role and potential benefits of nature-related disclosure
Disclosure is the foundation of the audit and accounting practices used across the global financial system. Nature-related disclosure, therefore, is a necessary and foundational condition to financial markets to: Sufficiently value and price nature-related dependencies and impacts into their activities; Manage these nature-related issues and be able to act on them. Nature-related financial disclosures should cover all four types of nature-related issue (dependencies, imapcts, risks and opportunties), as well as an organisation’s responses to them.
Nature-related financial disclosures
The role and potential benefits of nature-related disclosure (cont.)
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References
The role and potential benefits of nature-related disclosure (cont.)
Nature loss can also pose risks for financial stability, and poor-quality nature-related financial disclosures can have significant implications for financial markets and supervisory authorities. For example:
- Governments and policy makers require disclosure in order to meet their national targets for global nature goals, as with those set by the Global Biodiversity Framework (GBF).
It is important to note, however, that nature-related disclosure is insufficient in and of itself to address the nature crisis. It is one of many tools needed to shift the relationship between business, finance and nature and reverse and halt nature loss. This is a whole of society problem that will be solved by coordinated action across many fronts by governments, business, finance and civil society.Introduction to the TNFD
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Introduction to the TNFD
In September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published a set of disclosure recommendations and guidance for organisations to report and act on evolving nature-related dependencies, impacts, risks and opportunities (nature-related issues).The recommendations and guidance will enable business and finance to integrate nature into decision making, and ultimately support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.
Want more? Explore the figure "The TNFD Recommendations & Additional Guidance".
See figure
Introduction to nature-related disclosures: The four pillars
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References
Introduction to nature-related disclosures: The four pillars
TNFD’s work builds on that of the Task Force on Climate-Related Financial Disclosures (TCFD), and the framework follows the same four-pillar approach to disclosure and has aligned as much as possible with the language of the TCFD. All 11 TCFD recommended disclosures have been incorporated into the TNFD recommendations and three additional recommended disclosures, specific to the nature context, have been added for a total of 14.
Diagram of disclosure recommendations
The four pillars are:
Governance
Strategy
Risk and Impact Management
Metrics and Targets
Introduction to nature-related disclosures: The six key general requirements
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References
The six key general requirements
These disclosure requirements are crosscut by six key general requirements, which must be evidenced in each company’s disclosures:
2. The scope of disclosures
1. The application of materiality
3. The location of nature-related issues
5. The time horizons considered
4. Integration with other sustainability-related disclosures
6. Engagement of indigenous peoples, local communities, and affected stakeholders
The LEAP Approach
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References
The LEAP Approach
The TNFD's LEAP approach is an integrated way of identifying and assessing nature-related dependencies, impacts, risks and opportunities. It aims to help organisations carry out the due diligence needed to inform disclosure statements aligned with the TNFD Recommendations, but it is useful to all organisations, even those who are not reporting.
Diagram of LEAP
The four pillars are:
Want more? Read about this example of the LEAP Application: Ecopetrol
See example
The Global Biodiversity Framework
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References
The Global Biodiversity Framework
The Kunming-Montreal Global Biodiversity Framework is a landmark international agreement which aims to reach a world living in harmony with nature by 2050. It was agreed at the fifteenth Conference of Parties (COP15) to the Convention on Biological Diversity (CBD) in December 2022. It is the successor to the Aichi Targets, set in 2010, which were not successful, and has been hailed as a “Paris moment for nature” after the landmark Paris Agreement on Climate Change adopted in 2015. The headline target is Target 3, which aims to conserve 30% of the world’s land and 30% of its ocean by 2030. However, of most interest to the market is: Other relevant targets include:
- Target 7 to reduce pollution;
- Target 18 on the reform or elimination of harmful subsidies and incentives;
- Target 19 which calls for an increase in financial resources to help resolve the biodiversity crisis.
None of what was agreed in the GBF is legally binding, however many countries have agreed to turn the promises of the framework into action by drawing up national plans for implementation and reporting on these to the CBD. The Global Biodiversity Framework provides the international policy consensus under which TNFD's work sits.Target 15
The broader financial reporting and regulatory landscape on nature-related issues
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The broader financial reporting and regulatory landscape on nature-related issues
Financial reporting standards
Central Banks & Supervisors
National regulation
Close this task and proceed on your journey
Task complete
Vulnerability caused by damage to natural capital and a decline in an ecosystem service (for example, pesticides killing insects and a decline in level of pollinators leaving crops to go unpollinated or a dwindling water supply causing shortages for cooling a nuclear power plant, meaning that it may need to be shut down).
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
University of Cambridge Institute for Sustainability Leadership (2022). Nature-related financial risk: use case The EU Farm to Fork Strategy and Fertiliser Companies. available online.
TNFD (2021). Draft recommended disclosures TNFD. available online.
TNFD (2021). Draft recommended disclosures TNFD. available online.
The TNFD's recommended disclosures
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
The University of Cambridge Institute for Sustainability Leadership (2022). Nature-related financial risk: use case. available online. UN Environment Programme’s Sustainable Blue Economy Finance Initiative (UNEP FI SBE) (2022). Harmful Marine Extractives: Understanding the risks & impacts of financing non-renewable extractive industries Deep-Sea Mining. available online. Barbiroglio, E. (2021). No Water No Microchips: What Is Happening In Taiwan? Forbes. available online.
Risks arising from the breakdown of the entire system, rather than the failure of individual parts. Characterised by modest tipping points combining indirectly to produce large failures and cascading interactions of physical and transition risks (contagion), as one loss triggers a chain of others and stops systems from recovering their equilibrium after a shock (for example, the loss of a keystone species such as sea otters, who, upon being hunted to near extinction, upended the structure of coastal ecosystems).
The organisation should consider the relevant short-, medium-, and long-term time horizons, thinking about the useful life of the organisation's assets and infrastructure. It is important to remember that nature-related risks and opportunities are often arise in the medium- or long-term.
Taiwan is the largest manufacturer of microchips in the world, accounting for over 60% of the total foundry industry revenue globally. However, microchip manufacturing is very reliant on high-quality water to cool its systems and rinse away industrial chemicals. One major Taiwanese microchip manufacturer alone uses on average more than 150,000 tons of water per day to maintain operations. Taiwan normally relies on monsoons for its water supply, but a lack of rainfall has caused droughts. Due to the water shortage, Taiwanese microchip manufacturers started relying on water trucks to maintain production. While the Taiwanese government has repeatedly insisted that the global microchip supply chain will not be affected by the drought, the water supply to citizens and businesses was suspended for two days a week in some cities. The water shortage in Taiwan also risked impacting one of the most important links in the world’s tech supply chain and has added pressure to an industry already struggling with a severe microchip shortage due to the Covid-19 pandemic.
TNFD (2023). Definitions of opportunities TNFD. available online.
This will help investors, lenders, insurers and other users of nature-related financial disclosures understand the role an organisation’s board plays in overseeing nature-related risks and opportunities, as well as management’s role in assessing and managing those risks and opportunities.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
The Mesoamerican reef is the largest barrier reef in the Western hemisphere. It is under intense strain from human pressures which mean that it is more difficult to regenerate naturally after hurricanes – which themselves are becoming more frequent and intense due to climate change. This is a problem, as the reef is important for fishing, tourism, and as coastal protection during storm surges. One local community has been able to take out parametric insurance on the reef to help fund conversation efforts after each hurricane. If they can prove that the wind speed reached a certain number, then the insurance pays out. This has joined a trend of other governments insuring their natural assets to secure funding for their conservation.
Target 15 requires governments to: Take legal, administrative or policy measures to encourage and enable business, and in particular to ensure that large and transnational companies and financial institutions: (a) Regularly monitor, assess, and transparently disclose their risks, dependencies and impacts on biodiversity, including with requirements for all large as well as transnational companies and financial institutions along their operations, supply and value chains, and portfolios; (b) Provide information needed to consumers to promote sustainable consumption patterns; (c) Report on compliance with access and benefit-sharing regulations and measures, as applicable; in order to progressively reduce negative impacts on biodiversity, increase positive impacts, reduce biodiversity-related risks to business and financial institutions, and promote actions to ensure sustainable patterns of production.
Financial materiality focuses on how dependencies and impacts on nature create risks and opportunities for an organization’s financial position. The information is aimed to support decision-makers by investors. This is currently the materiality approach standard-setters (International Standard Setters Board) ISSB and the US Securities and Exchange Commission SEC require organizations to apply to their sustainability disclosures.
The TNFD Recommendations & Additional Guidance
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Deep sea mining is the process of collecting mineral deposits from the deep sea, which is defined as the area of ocean below 200m deep. It covers about 65% of the Earth’s surface. There is a growing interest in deep sea mineral deposits, largely due to declining terrestrial mineral deposits needed for important functions in society. So far, the focus has been on exploring this area – no mining activities have yet been carried out.The United Nations Environment Programme highlights the following impacts deep sea mining would have on deep sea ecosystems:
- Loss or reduction in marine biodiversity due to noise or disturbance;
- Loss of ecosystem resilience and provision of ecosystem services due to pollution;
- Loss or degradation of coastal and marine habitats due to dredging or mineral extraction;
- Reduction in animal welfare due to issues such as noise pollution;
- Increases greenhouse gas emissions due to vessels and offshore extraction activity (such as flaring and venting of gas);
- Changes to marine biological, chemical and geological cycles due to pollution or removal of mineral layers from the seabed.
In addition to these, deep-sea mining impacts may disrupt other industries such as fishing, shipping, subsea cables and pharmaceutical/scientific research.Risks faced by those engaging in exploration for deep sea mining include reputational risks due to strong calls from the private sector and civil society for a moratorium on deep-sea mining, a lack of existing regulation means that regulatory changes could suddenly make companies legally liable for their mining activities.Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
In addition to the global standards-setting, there are a few countries who have already - or are in the process of – making corporate disclosure on nature mandatory. The key example here is Article 29 in France, which requires all French financial institutions to disclose both biodiversity and climate-related risks and impacts. This law is aligned with the EU Taxonomy, and replaces 2016’s Article 173, which required French investors to disclose their climate-related risks.
The geographic location of an organisation's interfaces with nature affect the organisation's nature-related issues, so should be taken into account.
Investors and other stakeholders need to understand how nature-related risks and opportunities may affect an organisation’s businesses, strategy and financial planning over the short, medium and long term. Such information is used to inform expectations about the future performance of an organisation.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
A nature-related impact is a change in the state of nature, which may result in changes to the capacity of nature to provide social and economic functions (for example, pollution of a river by a factory). These impacts can be positive or negative.
TNFD (2023). LEAP - the risk and opportunity assessment approach TNFD. available online.
A nature-related dependency is an aspect of ecosystem services that an organisation or other actor relies on to function (for example, a reliance on clean water to irrigate crops).
Indigenous Peoples are stewards of 80% of the world's reminaing biodiversity and a source of traditional knowledge about the planet's ecosystems. The organisation should describe its process for engaging with Indigenous Peoples, Local Communities, and affected stakeholders about their concerns and priorities.
Actions to protect, sustainably manage and restore natural or modified ecosystems that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits (for example, creating green roofs and walls in cities can moderate the impacts of heatwaves, capture storm water and abate pollution, as well as help with human physical and mental health).
Impact materiality focusses on whether a company's activities might have a significant impact on the economy, environment and people. Impact materiality takes into account a wider group of stakeholders than financial materiality, and is for the benefit of multiple stakeholders, such as investors, employees, customers, suppliers and local communities. Within the EU Corporate Sustainability Reporting Directive (CSRD), the European Financial Reporting Advisory Group (EFRAG) requires organizations to apply both financial and impact materiality. This approach to materiality is often referred to as double materiality.
In 2022, the World Bank issued the first Wildlife Conservation Bond around black rhinos in South Africa, a brand-new financial instrument, in partnership with private financial institutions Credit Suisse and Citigroup. The instrument will “channel investments to achieve conservation outcomes – measured in this case by an increase in black rhino populations” which are facing severe decline. The bond is worth US$150 million and will be five years long – it is being bought by institutional investors as well as high net worth individuals. This is a model that can be replicated and scaled to other conservation and climate actions and provides an investment opportunity that contributes to a more nature-positive future.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
TNFD (n.d.). Definitions of risks» TNFD. available online.
Syrinx Environmental for BHP (2023). NATURAL CAPITAL ACCOUNTING FOR THE MINING SECTOR BEENUP SITE PILOT CASE STUDY. available online. TNFD (2023). Taskforce on Nature-related Financial Disclosures (TNFD) Recommendations – TNFD. available online. Group, A. | A.C.D. (2023). Grande Mayumba. ACDG | African Conservation Development Group. available online. Gutiérrez, A. (2022). A unique initiative to save Mexico’s coral reef. BBC Reel. available online. PRETORIA (2022). Wildlife Conservation Bond Boosts South Africa’s Efforts to Protect Black Rhinos and Support Local Communities. World Bank. available online.
TNFD (2023). Executive Summary - v0.4 of the TNFD beta framework» TNFD. Available online.
Organisations should describe which approach they are using.
The Global Biodiversity Framework indicates growing momentum around nature-related issues at the international policy level. This can also be seen within the financial regulatory community, for example:
Organisations should describe what activities and assets they are disclosing against, which parts of the TNFD framework they are using, and whether this will change in future. In addition, organisations should also clearly identify information that is relevant to their direct operations, upstream value chains, and downstream value chains.
Investors and other stakeholders need to understand how an organisation measures and monitors its nature-related risks and opportunities. Access to the metrics and targets used by an organisation allows investors and other stakeholders to better assess the organisation’s potential risk-adjusted returns, ability to meet financial obligations, general exposure to nature-related risks and opportunities, and progress in managing or adapting to those risks and opportunities.
A subset of nature-based solutions, natural-climate solutions including conservation, restoration and improved land and sea management that increase carbon storage and/or avoid greenhouse gas emissions, enhance resilience, and assist climate adaptation across global forests, wetlands, mangroves, grasslands and agricultural lands and other habitats (for example, protecting forests as a vital carbon sink for emissions).
TNFD’s categories of nature-related risk
There are close relationships between the different forms of risks. Physical and transition risks can interact and affect economic agents through various channels, before materialising into traditional sources of financial risk (e.g., credit or market risk). For example, organisations can generate acute physical risk by removing coastal marshes, leading to potential damage costs linked to loss of coastal infrastructure from storms. This can also generate a transition risk, specifically policy and legal risk (if that action was illegal) and reputation risk (if it is negatively perceived by consumers). If sufficient organisations in that region remove coastal marshes, then whole regions of industry may suffer from a lack of protection from coastal storms, resulting in systemic risk.
Agriculture generates up to 29% of total greenhouse gas emissions. Yet in turn, agriculture is extremely sensitive to the negative impacts of climate change. It also relies heavily on water. Moreover, to meet increased food demand as a result of expected global population growth, agriculture yields must become 70% higher over the next 30 years. In response, an Israeli manufacturer of irrigation equipment developed precision irrigation technology to optimise the amount of water and nutrients delivered to each plant. This enables farmers to grow bigger yields using fewer resources. Precision irrigation technology uses 45% less water and can reduce greenhouse gas emissions by up to 85% compared to traditional flood irrigation. The innovative solution also reduces farmers’ dependence on rainfall, lowers energy consumption by 40% and can increase average crop production by up to 55%. For the organisations adopting the technology, as well as saving water, the method can cut consumption of energy and labour leading to large-scale, long-term sustainable savings. The manufacturer received access to new funding mechanisms, attracting over US$50 million in investment from a multilateral organisation in 2020.
Ecopetrol S.A. is the biggest company in Colombia and its largest producer of oil. The company has positioned itself at the forefront of new environmental management frameworks to become a pioneer in the oil and gas sector in Colombia. It applied the TNFD’s LEAP approach in assessing nature-related risks in the Yariguí-Cantagallo oil field under its operation. The main findings from its LEAP assessment are outlined below: Locate: Ecopetrol has access to a significant amount of nature data which has been instrumental in identifying its operations and assets in the study area, identifying the interface with nature and defining high-risk ecosystems by analysing biotic and abiotic factors as well as impacts like water use. Evaluate: The pilot adopted tools like ENCORE, IBAT and WWF's risk filter which have proven very useful for evaluating dependencies and impacts - gaining an overview of the significance of ecosystem services, prioritizing the main dependencies and impacts, and guiding the development of scenarios for associated risks and opportunities. Assess: Risks and opportunities were identified using Ecopetrol’s existing integrated risk management framework and integrating the TNFD’s identification principles. Exposure and magnitude indicators for each risk and opportunity were established to determine their financial implications.
In addition to the work of central banks and supervisors, there are two emerging international reporting standards around climate and nature-related reporting and disclosure. The first is coming from the European Union (EU) - specifically the European Financial Reporting Advisory Group (EFRAG). This builds on EU policy and legislative work including the Green Deal, the Green Taxonomy and investor disclosure requirements for sustainable finance. Upon completion, it will be taken up by the EU Corporate Sustainability Reporting Directive, a new law requiring sustainability disclosure which applies to over 50,000 large European companies. EFRAG is taking a comprehensive approach from the get-go, looking at the interdependence between different environmental, social and governance approaches. The second is a global baseline coming from the recently launched International Standards Sustainability Board (ISSB). ISSB is explicitly starting with climate disclosures, and the primary audience is intended to be investors.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
TNFD (2023). Definitions of opportunities TNFD. available online.
Täger, M. (2021). ‘Double materiality’: what is it and why does it matter? available online. Calace, D. (2020). Double and Dynamic: Understanding the Changing Perspectives on Materiality. available online.
TNFD (2021). Draft recommended disclosures TNFD. available online.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Investors and other stakeholders need to understand how an organisation’s nature-related risks are identified, assessed and managed and whether those processes are integrated into existing risk management processes. Such information supports users of nature-related financial disclosures in evaluating the organisation’s overall risk profile and risk management activities.
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
TNFD’s categories of nature-related opportunities
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
Section overview
The role and potential benefits of nature-related disclosure
Welcome
Recap on nature-related dependencies & impacts
Introduction to the TNFD
Introduction to nature-related disclosures: The four pillars
Introduction to nature-related risks
Introduction to nature-related risks: Case studies
The six key general requirements
Introduction to nature-related opportunities
The LEAP Approach
Introduction to nature-related opportunities: Case studies
The Global Biodiversity Framework
The broader financial reporting and regulatory landscape on nature-related issues
The concept of materiality
The African Conservation Development Group (ACDG) has leased, on a long-term basis, 731,000 hectares of forested and savannah land in Nyanga Province, southern Gabon, for its Grande Mayumba project, with plans to invest $160m into developing commercial activities and infrastructure, alongside preserving one third of the project area as a conservation arc. “Over 25 years, we expect to avoid [around] 200 million tonnes of carbon emissions in the project area, preventing unplanned development, deforestation and degradation of the ecosystem while delivering sustained commercial value,” the company’s website states. The ACDG is also currently making plans around a potential initial public offering that would enable investors to benefit from a future stream of carbon credits, linked to the Grande Mayumba project. It is also exploring launching a securitised bond, fully or partially underpinned by carbon credits. Its work utilises a model that measures the difference in carbon emissions between planned development, which is carefully planned to minimise deforestation, and unplanned development, specifically within so-called ‘high forested, low deforestation’ countries — such as Gabon and its neighbours.
Organisations should ensure that TNFD disclosures are included with other disclosures – and that any conflicts or trade-offs with other risks (e.g.) climate are identified. Nature-related information in climate-related disclosures should also be connected to the relevant nature-related disclosures.
Risks that result from a misalignment between an organisation’s or investor’s strategy and management and the changing regulatory and policy landscape in which it operates (for example, a policy put in place by the EU to reduce harmful fertiliser usage could significantly impact the valuation of a fertiliser company).
In the United Kingdom, farming practises focus on short term crop yields and profit making – this is causing a severe decline in the health of soil. Research has shown that “degrading land poses a material risk to the profitability of those who farm it and, by extension, to those who lend to the farmers.” This is particularly acute when degrading land is impacted by extreme weather events such as storms and floods, which are becoming more common in the United Kingdom due to climate change. Prolonged wet seasons can cause soil erosion leading to unstable riverbanks and changes to the soil pH levels. In addition, valuable soluble nutrients such as nitrogen, potassium and phosphate can diminish in the run-off, setting the stage for poor plant growth. Consequently, farmers working on degraded land are likely to use more fertiliser to help make up the productivity rate, which makes them more vulnerable to price spikes in the fertiliser industry. Evidence suggests that degrading land can suffer a negative impact on yield of up to 40% following an extreme weather event, while average declines are lower, around 5%. It is estimated that 9% of arable land in the United Kingdom is degrading, but this will likely be increased by climate change. This physical risk could then contribute to a systemic risk, as demand for food is forecast to increase by more than 50% between 2010 and 2050.
The TNFD's revised risk and opportunity assessment approach (LEAP)