TNFD: The challenging and critical path ahead

The publication of the final draft of the Task Force for Nature Related Disclosures (TNFD) brings us closer to the challenges of managing nature-related risks, but also presents multiple challenges for asset managers and owners, writes Scott Foster, head of digital & governance solutions, UK, CACEIS.

Managing biodiversity risk is going to be equally important to our clients as climate risk, so we really welcome the new Task Force for Nature Related Disclosures (TNFD) framework. While it has until now been in development, the essence of the TNFD framework aims to enable organisations to effectively consider, report, and act on evolving nature-related risks and opportunities using the LEAP approach (Locate, Evaluate, Assess, Prepare). This, as well as the identification of 10 core ‘Dependencies & Impacts’ metrics, as well as five core ‘Risk & Opportunity’ metrics, with sector specific metrics attached, is a great step forward, with final recommendations to be published in September this year.

The need for structured framework, and clear guidelines on metrics and targets is evident, with research from EcoVadis in 2021, highlighting that ‘less than 1% of companies had set policies on biodiversity. This figure increased to 5% for companies in high-risk sectors like agriculture and construction’. Misconceptions still remain across all areas, from companies through to the financial services sector, that measuring and tracking progress on biodiversity risk is still too complex. Furthermore, dependencies and impacts on nature are location and sector specific.

Unlike the standard reporting frameworks that exist for monitoring carbon emissions and pollution, there are no universal measurements for reporting on biodiversity. Collecting quantifiable metrics will be a challenge, despite having the TNFD framework in place. Furthermore, there’s education to consider in order fully activate initiatives like TNFD – the financial services industry is catching up on the subject of biodiversity risk, having recently focused resources on SFDR, EU Taxonomy, and TCFD implementation.

Everyone should view TNFD as a good starting point

Governments and regulators now have an eye towards biodiversity risk, with over 190 states committing to a set of ambitious goals and targets under the Global Biodiversity Framework (GBF) in December 2022. Biodiversity loss is also now recognised by the world’s central banks, via the Network of Central Bank and Supervisors for Greening the Financial System (NGFS), as a source of systemic risk alongside climate change.

Certain industries are more prone to biodiversity risks across their supply chains. For example, food production, agriculture and forestry industries usually require intense harvesting of natural resources or rely on a single type of crop or livestock. In fashion, there is a reliance on raw materials and water. It’s important that companies focus on making their supply changes more resilient and adaptive not only protect nature, but to limit their exposure to biodiversity risks that could lead to rising business costs, litigation, and re-evaluation of debt servicing capacity.

And it’s key that asset managers and asset owners begin to look at biodiversity risks across the companies they invest in. This includes engagement on biodiversity issues and close scrutiny of supply chains and ground truthing – on-the-ground research and due diligence.

It’s against this context, that asset managers and pension schemes need to act and, once published, should view the TNFD framework as a good starting point. One of the key goals of TNFD is to encourage early action by companies and financial institutions to begin reporting nature-related dependencies, impacts, risks and opportunities, given the urgent need to address both nature loss and climate change in an integrated way.

Early implementation challenges to be expected

UK pension schemes over £1 billion in the UK have only recently started adopting the Task Force on Climate Related Financial Disclosures (TCFD) to assess and report on climate risks. Here, the availability, quality and consistency of data has been a challenge, and there have been many different approaches to the way pension schemes have adopted the TCFD framework.

It’s important to remember that TCFD helped pension schemes develop a strategy and policy to managing climate risk – but how each scheme gets there will depend on the data available to them.

We anticipate that similar if not more data challenges that will apply to TNFD, however it will certainly provide a structured path to increase disclosure ambition over time.

The data challenge – perfection is the enemy of good

This Pillars of the TNFD are a great starting point helps asset managers and asset owners set their overall approach to biodiversity risk, however sourcing data is the biggest challenge. Reliable, transparent, and cost-effective data is needed to develop a data strategy that feeds into investment decision-making, engagement and governance.

The TNFD framework highlights recommendations around metrics for assessment and disclosure. This includes, for example, metrics used to measure and manage nature-related risks and opportunities, and measure and manage dependencies and impacts on nature.

The framework is pragmatic and recognises that it will take time to source reliable, decision-useful data and expects that only over time, metrics should be provided against historical baselines.

Is the lack of data an issue? Yes and no. In the early adoption of TCFD by some pension schemes, access to data was a challenge but this did not stop them from implementing the framework, because it brought with it an element of discipline and focus around managing climate risk.

And because biodiversity risk is multi-faceted, access to data right now is more challenging. I do expect an improvement in the availability of data and information as the broader market begins to look more closely at nature-related risks. And organisations, such as the International Sustainability Standards Board (ISSB), as well as The Partnership for Biodiversity Accounting Financials, are working to develop standards for a global baseline of sustainability disclosures, which will bring more consistency to metrics.

Meanwhile, there is currently data available to help map high priority sectors and geographies from a nature-related risk perspective so asset managers and asset owners can determine their level of exposures to these risks.

Furthermore, it’s worth mentioning that a big challenge with TCFD was the use of climate-related scenario analysis, which has been a challenge for many organisations, especially as the availability of climate data was limited at the time. To this end, the TNFD has developed a practical and modular approach to the use of scenarios, making this process more flexible and adaptive – and includes a set of pre-defined scenarios so organisations can make a quick start.

Education paramount

A final challenge is making sense of biodiversity and nature risk. What we’ve learnt at CACEIS is that education is the crucial ingredient when new frameworks, such as TNFD, become available. Asset managers, asset owners, fund boards and trustees have spent the last two years familiarising themselves with climate risk and will now have to begin the journey with biodiversity risk. Although TNFD simply provides the framework, the concepts within it need to be understood by those implementing it and interpreting it. This could serve to lengthen the time it takes for TNFD to be adopted.

A final word: once fully published, the TNFD framework will be a useful and consistent way to direct global financial flows away from nature-negative outcomes, and toward nature-positive outcomes. Above all, TNFD brings us closer to the challenges of managing nature-related risks, and identifying opportunities – and that’s a positive move.

«