The TNFD Framework Explained and Why Nature-Related Risk Matters
20th September 2023
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Climate-related risk has become a well-researched and understood topic for organisations, but nature-related risk has taken a little longer to come into focus as a key area companies should be addressing. Climate and nature are interrelated and must therefore both be considered to truly achieve a net zero transition. While climate change has well-defined starting points and metrics like greenhouse gas emissions, assessing and categorising the impact on nature has proven more challenging. The forthcoming Taskforce on Nature-related Financial Disclosures (TNFD) framework aims to bridge this gap. Here we explore: what is the (draft) TNFD framework, what is the purpose of TNFD, who uses it, why consider reporting to the TFND and what are nature-related risks?
What is the TNFD framework?
The Task Force on Nature-related Financial Disclosures is a global initiative similar to the Taskforce on Climate-Related Financial Disclosures (TCFD) but is specifically focused on environmental risks and opportunities related to nature.
The TNFD framework aims to standardise and improve reporting on the impacts of business activities on nature, helping organisations assess and manage nature-related risks and opportunities effectively.
It is also an avenue to channel capital flows into positive action.
TNFD is in the process of testing and refining its framework. The release of Version v1.0 of the full framework for market adoption is expected to be released in September 2023.
What is the purpose of TNFD?
The TNFD serves to encourage businesses and financial institutions worldwide to evaluate and disclose the financial implications of their interactions with nature and biodiversity.
Similar to the TCFD for climate change, TNFD seeks to enhance transparency by enabling companies to assess nature-related risks and opportunities, facilitating informed decision-making that aligns with sustainable practices and the preservation of natural resources.
How does the TNFD framework define nature-related risks?
The TNFD framework defines nature-related risks as those arising from a company’s dependencies on and impacts on nature and biodiversity. These risks can have significant financial implications, as they may affect resource availability, disrupt supply chains, impact regulatory compliance, and result in reputational damage. For businesses, nature-related risks are intertwined with the benefits they gain from operating within biodiverse, healthy, and functional ecosystems. These benefits are extensive and cannot be easily measured or captured in a single indicator. Examples include:
- access to raw materials as a result of healthy soil, adequate water, successful pollination, and healthy oceans;
- the reliance of customers, staff and supply chain health on the essential functions provided by nature, such as filtering air and water or regulating the occurrence of storms, diseases and pests like insects;
- resilience of associated ecosystems to flood, drought and cyclones, erosion control (important for the stability of built infrastructure); and
- amenity value, mental and spiritual benefits, tourism and recreational opportunities associated with varied habitats, and their unique plant and animal species.
All these nature benefits are threatened by biodiversity loss and ecosystem degradation.
The World Economic Forum ranks biodiversity loss as the third largest global risk over the next ten years. We do not have decades to gradually get used to the problem and take action, nature-related risks need to be studied and addressed now.
The TNFD framework aims to help businesses identify, assess, and disclose these risks to promote informed decision-making and sustainable practices.
Who reports to the TNFD?
The TNFD framework is designed to be used by a wide range of entities, including companies, financial institutions, investors, and other stakeholders.
The goal is to encourage both businesses and the financial sector to assess and disclose their nature-related risks and opportunities. While the framework is still being developed and refined, the expectation is that companies and financial institutions that have significant impacts on nature and biodiversity will be encouraged or required to report to the TNFD.
TCFD vs TNFD – what’s the difference?
TCFD (Task Force on Climate-related Financial Disclosures):
The TCFD focuses on climate-related risks and opportunities, encouraging reporting on emissions, energy use, and carbon pricing to integrate climate into financial strategies.
TNFD (Task Force on Nature-related Financial Disclosures):
Concentrates on nature-related risks and opportunities, aiming to integrate biodiversity, resource use, and ecosystem health into financial decision-making.
Both initiatives promote transparency, enabling informed decisions for sustainable practices, but TCFD deals with climate impacts while TNFD addresses biodiversity and ecosystem impacts.
In practice, these impacts may be inter-related. A changing climate increases stress on ecosystems, and climate-related impacts may be magnified if nature becomes more vulnerable.
A classic example is healthy mangroves along Australia’s coastline that buffer damage to infrastructure from cyclones that may become more frequent in a warming climate. If these mangroves become damaged due to nature-related risks, such as poor water quality, inadequate sediment or warming oceans, then their buffering of climate-related impacts may be lost.
Preparing TNFD reporting alongside TCFD reporting can provide a company with a more comprehensive and holistic understanding of both.
What is the LEAP assessment approach for nature-related risk?
The TNFD focuses on four key areas: Governance, Strategy, Risk Management, and Metrics and Targets.
Core Components of the TNFD Framework. Source: TNFD Version v0.4 Beta Release, March 2023
To generate data to underpin the disclosures (along with other internal strategies, governance, and capital-related decisions), the TNFD has developed the LEAP assessment approach.
The LEAP assessment approach is as follows:
– Locate your interface with nature,
– Evaluate your dependencies and impacts,
– Assess your risks and opportunities,
– Prepare to respond to nature-related risks and opportunities and report.
LEAP is built on three core principles:
- Scope Clarity: It urges users to define their assessment scope thoughtfully before commencing.
- Stakeholder Engagement: Analysts and preparers are encouraged to collaborate with relevant stakeholders as they navigate the LEAP approach.
- Iterative Process: LEAP is designed to be iterative, aligning with enterprise risk management processes, reporting, and disclosure cycles. This applies across business locations and lines for corporations and across investment portfolios and asset classes for financial institutions.
It’s important to note that LEAP itself is not a mandated or recommended disclosure method by TNFD. Therefore, not everything identified, assessed, and evaluated using the LEAP approach necessarily needs to be disclosed as per TNFD recommendations.
Why should you consider reporting to the TNFD
TNFD reporting empowers organisations to navigate a changing business landscape, seize opportunities in the transition to a more sustainable economy, and contribute positively to environmental conservation.
There is also the possibility that in the future reporting to this framework may become mandatory, therefore companies who lean into understanding the framework early will benefit.
Drivers for reporting to the TNFD framework:
- Risk Management: Identify and address nature-related risks that could impact your operations, supply chains, resilience and long-term financial stability.
- Investor Confidence: Transparent reporting builds trust among investors and stakeholders by demonstrating your commitment to sustainable practices and may improve your access to capital.
- Long-Term Resilience: Integrating nature considerations into decisions enhances your ability to navigate challenges like resource scarcity and regulatory changes.
- Reputation and Innovation: Responsible reporting enhances your reputation, attracts sustainably aware consumers, and drives innovation for a competitive edge.
What steps can my organisation take now to understand our nature-related risk?
Organisations should consider the below steps to get a head start on nature-related risk measurement and management.
- Collate a spatial database of your company’s assets, key suppliers and licences, and key customers to support the identification of relevant local ecosystems.
- Review your company’s ESG policy to flag nature-related dependencies and risks that may need unpacking and further exploration.
- Identify what nature-related investments, certifications or regulations your company is already committed to monitoring and reporting against, such as:
- Sustainable sourcing policies (e.g. deforestation-free products, or responsibly-caught seafood)
- Water Stewardship
- Maintenance of biodiversity offsets under the EPBC Act
- Natural capital accounting, such as environmental condition monitoring via Accounting for Nature (AfN) or other standards
- Waste management standards or circular economy mechanisms
- Land-based GHG emissions accounts.
Want to understand more about the TNFD framework and how to report?
We support businesses across all stages of their climate and nature risk reporting including to the TNFD framework, the TCFD framework and also PCAF (Partnership for Carbon Accounting Financials) to enhance and integrate climate risk into internal processes.
To prepare for TNFD reporting, we can support your company to:
- Conduct a high-level ‘Locate and Evaluate’ assessment to identify material nature dependencies and risks,
- Analyse gaps and propose immediate opportunities for your business to consolidate data or improve monitoring of nature-related indicators, and
- Scope up a comprehensive process, including internal and external engagement, to conduct a full LEAP assessment according to those most material components.
We have team members who are on the TNFD Forum and are closely aligned with the latest developments in this space.