Nature-related financial disclosures: how do TNFD recommendations affect sustainability disclosures?

During Climate Week 2023, The Taskforce for Nature-related Financial Disclosures (TNFD) released its inaugural Recommendations on Nature-related Disclosures. Building on the work of the Taskforce for Climate-related Disclosures (TCFD), TNFD sought to accelerate the integration of nature-related topics in financial disclosures in a similar structure to TCFD.

From TCFD to TNFD

The Taskforce for Nature-related Financial Disclosures (TNFD) builds on the success of TCFD. The TCFD is an industry-led initiative supported by the Financial Stability Board (FSB), an international body that promotes international financial stability and includes membership from all G20 major economies. The formation of TCFD is based on the premise that climate risks are material to evaluating the financial outlook of businesses and markets. Thus this information should be disclosed by businesses and incorporated into investment decision-making.

TCFD released its recommendations with a set of 11 disclosures in 2017 and continues to support the broad adoption of its published recommendations. Its latest 2022 annual report highlights some successes in the diffusion of climate awareness and reporting among corporate reporting, but also notes challenges. The average number of recommended disclosures addressed per company increased from 1.4 in 2017 to 4.2 in 2022, but only 4% of companies are reporting in alignment with all 11 disclosures. Only around 50% are disclosing in line with at least five disclosures. Key challenges reported by companies implementing TCFD recommendations are 1) conducting climate-related scenario analysis, 2) estimating Scope 3 GHG emissions, and 3) developing processes for identifying, assessing, and managing climate-related risks and integrating such risks into existing processes. Following the finalization of the International Sustainability Standards Board (ISSB) general disclosure and climate-related disclosure standards, the FSB asked the IFRS Foundation to monitor the progress of companies’ climate-related disclosures from the TCFD as of 2024.

In July 2020, building on the success and enthusiasm surrounding TCFD, the launch of a new market-led and science-led initiative, the TNFD was announced. After a year of preparatory work, the Taskforce was launched in June 2021 with support from the G7, G20, and other influential leaders. After two years of consultations and framework development, the recommendations of the TNFD were officially released in September 2023

How does TNFD define the relationship between Nature and businesses?

Nature is a complicated concept to reconcile with business activities. It seems natural to think that businesses do not operate separately from nature, and thus businesses should have a relationship with nature. What is the nature of that relationship? The recommendations of the TNFD attempt to make this explicit.

TNFD’s first task is to define a taxonomy across nature, society, and businesses. It does so by describing nature as the encompassing entity that includes realms occupied by plants, animals, natural forces, and society, which is the world occupied by people. It defines a stream of benefits that nature confers upon its realms and society, such as the provision of raw materials, the natural replenishment cycles, and various regulation, maintenance, and cultural services of nature as environmental services that pass to society and the entities that exist within, such as corporations and economies. Within this simple framework, the TNFD abstracts the relationship that nature has with businesses as one that provides a number of services to another and one that is also capable of replenishing and repairing itself within its capabilities.

To start to familiarize companies with nature-related disclosures, the TNFD recommendations outline a conceptual foundation with key terms. It devotes a chapter to understanding the interactions between nature and business with key concepts such as

• Nature which refers to the natural world, with emphasis on the diversity of living organisms, including people, and their interactions with each other and their environment. It is composed of four realms: land, ocean, freshwater, and atmosphere. These are major components of the natural world that differ fundamentally in their organization and function.
• Society, which is the organization of people, interacts with and across all four realms. Society includes people, corporations, and financial institutions among other types of social organizations, all of whom depend on and have impacts on nature. Members of society contribute to and are affected by natural processes.
• An ecosystem is a dynamic complex of plants, animals, and microorganism communities and the non-living environment that interacts as a functional unit. Ecosystems are organized into biomes, which can be thought of as types of ecosystems. They are global-scale zones, generally defined by the type of plant life that they support in response to average rainfall and temperature patterns. Examples are tundra, coral reefs, and savannas.
• Natural capital is the stock of renewable and non-renewable natural resources, such as plants, animals, air, water, soils, and minerals, that combine to yield a flow of benefits to people. Natural capital consists of stocks of environmental assets – naturally occurring living and non-living components of the Earth, such as forests, wetlands, coral reefs, and agricultural areas. Ecosystem services are flows of benefits to people and the economy produced by ecosystems. They form the basis for understanding corporate dependence on natural capital and are crucial for corporate risk management. Any depreciation in natural capital will have a negative effect on ecosystem services.

The exchange between businesses and nature is captured through two pathways: the dependency pathway and the impact pathway. Since businesses depend on nature to provide ecosystem services (for example, water, neutralization of pollutants, and climate regulations), the dependency pathway captures how business activities depend on ecosystem services. An impact pathway, on the other hand, describes the effect of a specific business activity on changes in the stock (natural capital) and flows of ecosystem services. In alignment with ISO 31000 Risk Management Standard and other sustainability disclosure standards, TNFD also describes nature-related risks and opportunities as part of its framework.

Recommendations of TNFD

The recommendations of the TNFD follow the four recommendation pillars of TCFD. Instead of Risk management as the third pillar, TNFD refers to this pillar as Risk and impact management, highlighting the importance of impact in the relationship between nature and businesses. Furthermore, wherever TCFD refers to risks and opportunities in its recommendations, the concepts of dependencies and impacts are added, reflecting the expanded requirement for a contextual understanding of the bi-directional relationship between nature and businesses.

Across these four pillars (Governance, Strategy, Risks and impact management, and Metrics), the TNFD recommendations expand on the TCFD’s original 11 general disclosures with 3 additional disclosures related to the reporting of activities related to Indigenous peoples and local communities and risks and impacts across the value chain. Specifically, the three additional disclosures are

• Governance (C): An additional disclosure on the organization’s human rights policies and engagement activities, and oversight by the board and management, with respect to Indigenous Peoples, Local Communities, affected and other stakeholders, in the organization’s assessment of, and response to, nature-related dependencies, impacts, risks and opportunities.
• Strategy (D): An additional disclosure on the locations of assets and/or activities in the organization’s direct operations and, where possible, upstream and downstream value chain(s) that meet the criteria for priority locations.
• Risk and impact management (A): Separate disclosures for the processes for identifying, assessing, and prioritizing nature-related dependencies, impacts, risks, and opportunities in its direct operations and its upstream and downstream value chain(s).

These enhancements in the recommendations of the TNFD reflect the adoption of the broader understanding of the relationship of businesses with external stakeholders, including climate, nature, planet, and the people in various societies that they come in contact with. These recommendations ask businesses to not only consider their own risks and opportunities associated with nature but also understand the ecosystem services that nature provides to enable its operations and the effect of its operations on the regenerative capabilities of nature. They are, thus, aligned with views of major sustainability standards, including GRI, ISSB, and ESRS (as part of the CSRD regulation). The recommendations are developed with market usability as one of the primary principles to facilitate broad-based adoption.

Note: This is the first of a three-part series on nature-related disclosures. In our next article, we dive into the LEAP methodology for measuring and reporting on nature. In the last installment of this series, we discuss disclosure guidances for biomes or spheres of ecosystems with particularities in their biodiversity and climate conditions.

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