April 21, 2022
Nature in focus: How to manage nature-related risks and opportunities
Nature loss is a planetary emergency. More than half of the world’s GDP is dependent on nature1 – that’s approximately 44 trillion USD of economic value generation2. In turn, nature loss poses a significant risk not only to biodiversity and ecosystem degradation, but also to corporate and financial stability.
Despite this, there currently are no solid tools available for businesses to understand the concrete ways in which nature impacts their financial performance, nor the longer-term financial risks connected to how they interact with nature. Realizing this, the Task Force on Nature-Related Financial Disclosures (TNFD) set out to provide organizations with a risk management and disclosure framework to report and act on evolving nature-related risks. The initiative was announced in July 2020, with the first beta version of the framework being released earlier in March this year.
Starting out with a climate task force
Back in 2015, the Task Force on Climate-Related Financial Disclosures (TCFD) was created by the Financial Stability Board, an international monitoring body consisting of all G20 major economies, the European Commission, and members of the Financial Stability Forum (FSF – the TCFD’s predecessor). The purpose of the TCFD is to ensure that relevant financial players such as companies, banks, and institutional investors disclose their exposure to financial risk resulting from climate change impacts on their business models. With the overarching goal of facilitating the financing of a sustainable economy, the TCFD set out to increase the amount of reliable and accessible information on financial institutions’ exposure to climate-related risks and opportunities. Four pillars underpin the TCFD: governance, strategy, risk management, as well as metrics and targets3. With the release of the latest assessment from the UN Intergovernmental Panel on Climate Change stating that the world is on track to warm to 3 degrees Celsius, channelling investments into climate action is more urgent than ever4. According to the Climate Policy Initiative (CPI), an estimated annual 4.5-5 trillion USD of global climate finance is needed to be on a 1.5-degree pathway5.
Much overlap exists when looking at levers to restore nature and eliminate greenhouse gas emissions as mentioned in the latest IPCC report4: ‘Reforestation, improved forest management, soil carbon sequestration, peatland restoration, and blue carbon management are examples of methods that can enhance biodiversity and ecosystem functions, employment, and local livelihoods.’ The two crises of nature and climate change are highly interconnected, and this is where the TNFD comes in.
The biodiversity twin of the TCFD
In line with the move beyond a sole focus on climate, the TNFD was formed in July 2020. Naturally, the TNFD framework is very closely aligned with the TCFD and will also align with the work-in-progress standards of the International Sustainability Standards Board (ISSB). Based on the same four TCFD disclosure elements6, the TNFD is an international market-led and government-endorsed initiative funded by the United Nations Development Programme (UNDP), the Global Environment Facility (GEF), and various governments. It is comprised of 34 task force members, backed by 350 institutional supporters, who are informed by experts within the fields of biodiversity, natural capital, market standards, and reporting practices. The TNDF is designed for a multitude of market actors, such as investors, analysts, corporations, regulators, accounting firms, ESG data providers and credit rating agencies.
Last month, the TNFD launched the first beta version of the framework and has invited market participants from around the world to participate in testing and giving feedback on the online platform. The first beta version consists of three core components: fundamentals, disclosure, and guidance. The platform will go through four rounds of market consultation and is expected to be finalized in September 2023.
While most of us by now are quite familiar with terms such as carbon footprint, greenhouse gases, and global warming, we have not yet (at least to the same extent) been familiarized with terminology for nature. The TNFD sets out to change this by classifying nature under four realms: land, ocean, freshwater, and atmosphere. These realms provide natural capital, which the economy and society depend on (yet are currently depleting them). Environmental assets are naturally occurring components of the earth, such as coral reefs, wetlands, and forests, of which ecosystems are an important part. These environmental assets give rise to a range of ecosystem services, such as water and clean air, that deliver value to business and society. Biodiversity is an essential characteristic of nature, and critical to maintaining its quality, resilience, and ability to provide value to humans. In addition to the definitions of nature, the first beta version also provides definitions on dependencies, impacts, risks, and opportunities7.
Disclosing nature-related risk
The TNFD framework provides a set of draft disclosure recommendations on nature-related risks and opportunities, based on the four pillars also used in the TCFD. The general disclosure requirements aim to increase transparency and provide markets with the necessary information to redirect capital into nature-positive sources. Ahead of the launch of specific disclosure requirements, companies should:
- Identify material nature-related risks and opportunities, based on an assessment of nature-related dependencies and nature impacts
- Consider the organization’s interface with nature at specific locations, recognizing that nature-related dependencies and nature impacts occur in specific ecosystems
- Consider how the correct skills and competencies are available to assess nature-related risks and opportunities, and oversee strategies designed to respond to those risks and opportunities
- Provide a statement regarding the scope of current disclosures and what further disclosures are planned
Managing nature-related risks and opportunities
The TNFD has also put forward a voluntary assessment framework for companies willing to undertake a structured process of identifying and engaging with their nature-related impact and dependency. The science-based framework is organized around a four-step process under the acronym ‘LEAP’:
- 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 on them
A benchmark to get ahead of the nature curve
For companies wanting to get a head start in the race toward halting nature loss, a holistic sustainability assessment holds the key to identifying specific areas for improvement. The Future-Fit Business Benchmark is one of the most ambitious sustainability management methodologies available to guide companies and investors. The Future-Fit Business Benchmark takes a holistic approach to achieving sustainability in companies, by combining many years of research into a clear guide on how to reach 23 break-even goals and an additional 24 positive pursuits to speed up the process8. Similar to the ambitions of the TNFD, Future-Fit’s Break-Even Goals 08 takes a look at operational encroachment9, with the goal for the company’s operations not to encroach on ecosystems or communities dependent on these. When aiming to eliminate the negative impacts of businesses on natural ecosystems, companies must ensure that they are:
- Protecting aquatic ecosystems from degradation (e.g. avoiding coral reefs)
- Protecting areas of high biodiversity value (e.g. no clearing of rainforests for farmland)
- Respecting the land rights of communities (e.g. zero tolerance on land grabbing) and not encroaching on areas of cultural importance
To be considered a future-fit business, it must protect the areas in which it already operates, as well as take steps to avoid or mitigate negative outcomes when moving into new areas. For companies wishing to proactively identify, address and eliminate their negative impacts on nature (and society), conducting a Future-Fit baseline assessment is the best way to get ahead of reporting requirements and establish science-based sustainability management practices.
With everything going on in the realm of business and nature, companies must do what they can to be at the forefront of halting and reversing nature loss. Ultimately, the race to achieve net-zero will only succeed if the same momentum is applied to the race towards nature-positivity.