TNFD Looks to Balance Comparability and Flexibility

V.04 of the nature risks and disclosure framework takes a streamlined approach to metrics through introduction of leading indicators.

The Taskforce on Nature-related Financial Disclosures (TNFD) has published its fourth and final beta framework (V0.4), with the most substantive additions relating to its approach to core global and sector-specific metrics.

The TNFD said it aimed to balance the complexities of the nature-related science with the practical reporting needs and constraints of companies and financial institutions when assessing risks, impacts and dependencies.

“Our approach to disclosure metrics is quite simple,” said Tony Goldner, Executive Director of the TNFD, noting that the TNFD has focused on a tiered set of “leading indicators” that are relevant across sectors and reflect global policy priorities.

Last year, the TNFD identified 3,000 nature-related metrics, an “unworkable” number for market participants to consider, Goldner acknowledged.

In response, it has streamlined those metrics using its leading indicators approach to provide report users with comparability across and within sectors, while providing report preparers with flexibility, reflecting the differences in nature-related issues across sectors and business models.

Within its leading indicators approach, the TNFD has established ‘core global’ and ‘core sector’ disclosure metrics.

The core global metrics covering impacts and dependencies include climate change, land/freshwater/ocean-use change, pollution/pollution remove, and resource use/replenishment, while those spanning risks and opportunities include nature-related risks and nature-related opportunities.

“We’re trying to provide a level of comparability for investors by encouraging similar disclosures on similar metrics, while also recognising that the framework needs flexibility to account for differences by sector or business model,” said Goldner.

“We feel like we’ve struck the right balance between the complexity of the science on the one hand and the reporting practicalities on the other.”

The approach is also designed to allow organisations to signal their alignment to global policy goals, such as the recently negotiated Global Biodiversity Framework much as they are now doing with climate reporting and net zero transition planning aligned to the goals of the Paris Agreement.

The TNFD has also included bi-directional measures of change to recognise positive business contribution to the state of nature and incentivise new business models aligned to nature-positive outcomes.

“Investors want to know, not just what to stop financing, but where the opportunities are, and what kind of new business models and new innovations can make a positive contribution to nature-positive outcomes,” he said. “To do that, we need metrics that highlight positive impacts on nature.”

The TNFD was established to develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks and opportunities, with the objective of supporting a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes.

V0.4 provides market participants with a full representation of the framework, including the Taskforce’s proposed approach to disclosure metrics.

Integrated climate and nature disclosures 

As part of ongoing efforts by the TNFD to be aligned with the Taskforce for Climate-related Financial Disclosures (TCFD), the former’s framework has incorporated six ‘General Requirements’ including: approach to materiality; scope of disclosure; links between nature-related dependencies and impacts, and risks and opportunities; location; integration with other sustainability issues; and stakeholder engagement.

“We have taken the exact same structural approach as the TCFD,” said Goldner. “But we have added these six general requirements which cut across four pillars of recommendations within the TNFD framework.”

While these general requirements were established in the TNFD framework since March 2022 (v0.1), the number has expanded, he said, with the six issues prevalent throughout the TNFD approach, he said. “It is going to be important that report users understand the approach that a report preparer has taken to these issues.”

As stated in its November (V0.3) of the framework, the Taskforce’s approach to materiality is to “enable to materiality preferences and needs of the report preparer”, said Goldner.

To account for “different views of materiality around the world”, the TNFD aimed to build a tool that works for the “largest possible number of organisations in different jurisdictions with different requirements”.

“Whatever materiality approach [report preparer’s] take, it’s important that it be disclosed and made clear to the record reader,” he said.

The Taskforce has also made minor adjustments to its proposed risk and opportunity assessment process and reduced its proposed recommended disclosures from 15 to 14 based on feedback.

But all 11 of the TCFD recommended disclosures have been incorporated into the TNFD final draft, providing market participants with a high level of alignment with the structure, language and approach to encourage and enable integrated climate nature disclosures.

Goldner added that there is a “good case” for adding three additional recommended disclosures, suggesting further changes may be made to the TNFD framework between now and its finalised release in September.

Scope for nature 

As part of its efforts to align with TCFD, the TNFD framework has adapted the notion of ‘scopes’ – used to categorise different types of emissions created by a company in its own operations and in its wider value chain – within a nature context.

For scope 1 (direct emissions) the equivalent for nature is referred to as ‘direct’, while scope 3 (indirect emissions) falls under three categories: upstream, downstream, and financed.

“We envisage there being some complexity around scope 3 equivalent reporting for nature, and recognising that, we think it’s important that at the top of the statement a company should disclose what the scope of its disclosures includes – is it just direct impacts, dependencies, risks and opportunities too? Or does it also include some level of upstream and downstream related reporting?” said Goldner.

“It’s important to acknowledge that nature-related issues are highly localised, they’re location specific,” said Goldner, adding that the TNFD encourages report preparers to discuss and disclose how their nature-related statements link to their climate-related disclosures – the so-called climate-nature nexus.

Assessment and sector guidance 

The TNFD’s risk and opportunity assessment (LEAP) approach has not changed significantly in V.04, but there have been a number of small “tweaks” based on market feedback.

The most significant change is the way in which large companies can prioritise their focus for analysis, said Goldner.

“Big agriculture and food companies have tens of thousands of suppliers, often in locations dotted all around the world, making it practically impossible for them to assess every location every year, subjecting them to limited assurance,” he said, adding that in V.04 has therefore introduced modified priority location screening criteria.

The latest version of the TNFD framework also provided new supporting guidance on engagement with affected stakeholders, as well as expanding guidance in relation to target setting and approaches to risk assessment and quantification corporations and financial institutions face from nature-related issues.

The latest iteration includes new draft guidance for sectors, including agriculture, food, energy, and mining and metals, with forestry, aquaculture, infrastructure and real estate, textiles and apparel, and chemicals and pharmaceuticals to follow in the finalised framework in September.

It also includes additional draft guidance for biomes, including tropical forests, rivers and streams, marine shelf, and intensive land use systems, with more to follow.

“We are delighted by the level of active participation from the market, including pilot testers, throughout this design and development phase which will help to underpin strong market support when the final recommendations are published in September,” said David Craig, Co-Chair of the TNFD.

The latest version of the framework offers draft guidance on nature-risk scenarios for companies, with ongoing development of scenarios for financial institutions with the Network for Greening the Financial System (NGFS) scheduled for publication in the September V1.0 release.

“The core of the framework remains largely intact and familiar, with new additional pieces of guidance,” added Goldner.

V0.4 follows the publication of three previous beta frameworks in March, June and November last year, which covered themes such as measuring and disclosing location-based impacts and risks, assessment metrics to support pilot testers, and dependency and impact evaluations.

Following the latest beta release (V0.4), the Taskforce will hold a formal consultation process from 30 March to 1 June, with a pilot testing programme for market participants running from 1 July to 1 June.

“Ongoing collaboration with our standards development partners and with regulators will also be critical to help codify the Taskforce’s recommendations so that nature-related reporting becomes standard business practice over time,” said Elizabeth Mrema, TNFD Co-Chair and Deputy Director of UNEP.

Like the TCFD, the TNFD is developing a global framework for risk management and disclosure, not a standard. The final draft draws from, and is designed to inform, relevant standards including those from the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), both knowledge partners to the TNFD.

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

 

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