Synopsis
Nature-related reporting is expected to follow TCFD. TNFD’s detailed framework sets out the issues as well as 14 recommended disclosures. Nature’s location-specific aspect provides different challenges to climate reporting and highlights certain sectors. Some metrics are yet to be agreed. Initially TNFD is likely to strengthen existing reporting under risk management, climate and pollution. TNFD’s own survey of 239 organisations, found that 76% of corporates thought they would be reporting against some of the TNFD disclosures by FY 2025
Some Leap Year Resolutions (ESG calendar 2024)
CEN News
A look before you LEAP
Industry is already adopting incoming CSRD and ISSB standards in its reporting. The Taskforce on Nature-related Financial Disclosure (TNFD) supports their approach highlighting additional potential disclosures to ensure broader coverage of environmental and social topics. ISSB has stated that it will use TNFD to help formulate future policies.
TNFD’s immediate impact may be limited as the nascent framework published in September 2023 is not yet fully developed and the regulatory focus remains more on climate disclosures. However, for some sectors and locations early adoption would be positive. More generally, biodiversity loss and ecosystem collapse are now recognized as major risks and two of the five main drivers of nature change; climate and pollution are already covered by most companies. Apart from those sectors where TNFD could be particularly relevant, we expect the framework will initially be used to strengthen existing reporting under risk management, climate and pollution.
Background
Broadening the scope of non-financial reporting to include nature is a natural extension of trying to understand the true long-term economic costs of doing business. Nature provides ecosystem services (explained below) which the TNFD states ‘communities need to survive and flourish, and that business and finance depend on to generate cashflow and returns’. It argues that these services are not being priced correctly which is contributing to the increasing levels of planetary and ecosystems risks.
Business has already recognised some of these risks with the widespread adoption of TCFD and Net Zero Transition Plans. TNFD has produced a risk management and disclosure framework for companies to identify, assess, manage and where appropriate, disclose nature-related issues. These cover the four realms of land, ocean, freshwater and atmosphere.
Challenges remain as nature-related issues are often location-specific, requiring a local response. This is in contrast to climate change which is a global challenge shared across the Earth. In addition, some of the relevant metrics and targets are still to be agreed.
Impetus
The Paris Agreement, almost a decade ago, focused efforts on a Net Zero future by 2050. Since 2010 the UN has had another 2050 global vision of a world living in Harmony with Nature. The vision received further backing at COP 15 to the UN Convention on Biological Diversity (UNCBD) in 2022 when 196 governments committed to ‘take urgent action to halt and reverse biodiversity loss to put nature on a path to recovery for the benefit of people and planet’ by 2030. To achieve this, COP 15 set out 23 targets in the Kunming-Montreal Global Biodiversity Framework (GBF).
In addition nature is increasingly recognised as a systemic risk by the Network for Greening the Financial System in 2022 and in 2023 the World Economic Forum (WEF) rated ‘Biodiversity loss and ecosystem collapse’ as the fourth greatest global risk, after climate change and natural disasters and extreme weather events. The GFANZ (Glasgow Financial Alliance for Net Zero) Principals Group has listed the integration of nature into net zero transition plans as a 2024 priority.
Response
In September 2023 TNFD published its framework. It is designed to be readily adoptable as it is aligned to ISSB and GRI while replicating the structure of all 11 climate-related TCFD disclosures. It is working closely wit the Science Based Targets for Nature (SBTN) for the relevant metrics and targets. TNFD believes that major corporates will be reporting against some TNFD disclosures by FY 2025.
One aim of TNFD is to support GBF’s 2030 Target 15 to advocate measures to encourage businesses to transparently disclose their biodiversity risks and impacts, provide information for consumers and comply with regulations. The target is to progressively reduce negative impacts on biodiversity and the related risks, and ensure sustainable patterns of production.
TNFD helps businesses meet this challenge. It has produced 14 recommended disclosures (see Appendix) which are designed to be consistent with TCFD and ISSB, accommodate different approaches to materiality and leverage the best available science.
Concepts
Underlying the TNFD is a framework which conceptualises many of the issues.
TNFD defines Natural Capital as the stock of renewable and non-renewable natural resources such as plants, animals, air, water, soil and minerals. Natural capital consists of stocks of Environmental Assets (e.g. forests, coral reefs, agricultural areas) which can be found within the four Realms (land, freshwater, ocean and atmosphere), and can be divided into Ecosystems. These ecosystems are divided into biomes which are generally determined by plant life, rain and temperature. Examples are tundra, coral reefs and savannas, but also include the urban and industrial biome.
These ecosystems provide benefits from Ecosystem Services which are divided into three types of services:
1. Provisioning (e.g. crops, wood and water).
2. Regulating and maintenance (e.g. water flow and climate).
3. Cultural (e.g. recreation and services).
Biodiversity is a distinct concept within nature and refers to variability of organisms across the four realms. It is an essential characteristic that enables ecosystems to be productive, resilient and adaptable. One risk is that over the medium and long-term compounding effects propel ecosystems through a tipping point to environmental change and in extreme cases non-recoverable biodiversity loss. This aspect is the focus of many government interventions including the UK, the EU and the GBF. As a result, SBTN’s metrics and targets include biodiversity alongside freshwater, land, ocean and climate (the latter integrating SBTi).
Special interests
One facet of Nature reporting at a global level is the spotlight on particular areas, industries and features. These interests may appear less relevant to UK/EU located operations, although may impact some UK/EU value chains.
Businesses should report activities in priority locations defined as either material locations where there are material nature-related dependencies, impacts, risks and opportunities in their operations or value chains or sensitive locations due to biodiversity importance, ecosystem integrity/ risk, water risk or important ecosystem service provision.
The latter includes provision for Indigenous Peoples, Local communities and affected stakeholders. Indigenous Peoples are those that have a historical continuity with pre-colonial societies and are determined to preserve and transmit to future generations their own cultural patterns and social institutions. This group is estimated to represent under 5% of the world’s population. However, affected stakeholders are anyone who has or may be affected by a companies’ operations, products or value chain with regard to nature-related issues, which appears all encompassing.
In addition special attention needs to be paid to High Impact Commodities (of which there are 47 animal, vegetable and mineral, ranging from avocadoes to zinc).
One result of these priorities is that a number of sectors come in for special treatment and TNFD has published specific sector advice beyond general requirements for nine.*
Challenges
TNFD’s disclosure architecture of dependencies, impacts, risks and opportunities is familiar in other reporting frameworks. Yet the location based specificity of nature means that some of the realms and most of the biomes may either be not material or even relevant to many businesses. However, the five drivers of nature change ** as well as many ecosystem services are applicable to many UK/EU industries and their value chains.
For a business to better understand its nature-related interactions TNFD recommends using a LEAP (Locate, Evaluate, Assess and Prepare) approach to understand nature-related interactions and to estimate a business’s environmental footprint. It also recommends SBTN for target setting although the latter is still under development awaiting details on two aspects (biodiversity and ocean) and more details on Steps 4 ‘Act’ and 5 ‘Track’.
Adoption
TNFD recognises that it will take time for businesses to get up to speed noting the slow start to TCFD adoption following its release in 2017. However, it believes progress on TNFD could be quicker as TCFD has led the way and TNFD is aligned to many other reporting standards (ISSB and GRI) as well as replicating all 11 nature-related TCFD disclosures in structure. Its own survey of 239 organisations across 11 sectors and 35 countries found that 76% of corporates thought they would be reporting against some of the TNFD disclosures by FY 2025.
Although some of these issues appear to be most relevant to large businesses directly involved in exploiting natural resources or developing land such as agribusiness or basic materials the link to the wider value chain and financial institutions significantly broadens its scope. TNFD has been designed for businesses of all sizes, although it recognises some SMEs will need additional support. In 2022 the ISSB signalled that it intends to draw on TNFD as and when it develops specific nature-related disclosure standards. Nature is now seen as a core and strategic risk management issue.
CEN-ESG conclusions
As a result, we believe that businesses should keep a close eye on how TNFD develops and especially on the future SBTN biodiversity metrics and targets. Where relevant businesses can use the current framework to bolster their existing reporting on climate and pollution.
CEN-ESG can help businesses reassess their material risks and opportunities through a Nature lense with its increased focus on climate, pollution and biodiversity using the LEAP approach on a location basis. This will help highlight any operations’ and supply chains’ material risks which may require further attention.
Investors, especially those with sustainability mandates/ labels, are likely to support early TNFD adoption and once current CSRD and ISSB proposals have bedded down governments may be more supportive of increased nature-related disclosure regulation. Such measures would be consistent with existing national 2030 biodiversity commitments. As a result, for those businesses in sectors or locations most obviously affected 2024 may prove a LEAP year in more ways than one.
*Oil & Gas, Metals & Mining, Forestry & Paper, Food & Agriculture, Electric utilities & Power generators, Chemicals, Biotech & Pharmaceuticals, Agriculture and Financial Institutions.
**Climate, Land/Freshwater/Ocean use change, Resource use/ replenishment, pollution/pollution removal, and invasive alien species introduction/removal.
Sources:
Executive Summary of the recommendations of the TNFD, September 2023
Biodiversity 2020: A strategy for England’s wildlife and ecosystem services, 2011
Getting started with adoption of the TNFD recommendations, September 2023
Guidance for Corporates on SBTN, September 2023
Guidance on Biomes, September 2023
Guidance on Engagement with Indigenous Peoples, Local Communities and affected stakeholders, September 2023
Recommendations of the TNFD, September 2023
SOME LEAP YEAR RESOLUTIONS
January:
IFRS-S1 and IFRS-S2 applicable for reporting periods after 1 January (Global)
ESRS 2 and other disclosures subject to a materiality assessment to apply to large public companies for FY 2025 (EU)
Sustainability Disclosure Requirements (SDR) consultation on anti-greenwashing guidance ends 26 January
Extension of EU cap and trade Emissions Trading System to cover maritime transport (large ships entering EU ports)
February:
Transition Plans Taskforce: Final Sector Deep Dives and Forward Pathway published.
May:
SDR All firms: Anti-greenwashing rule applies from 31 May (UK)
July:
SDR applies for firms using product labels including distributors of UK funds, consumer-facing, pre-contractual disclosures and naming and marketing rules (UK)
September:
CDP submission deadline
October:
COP 16 Convention on Biological Diversity hosted by Columbia
November:
COP29 UN Climate Change Conference hosted by Azerbaijan
December:
SDR applies for firms using sustainability-related terms without product labels and distributors of overseas funds: naming and marketing rules, consumer-facing and pre-contractual disclosures (UK) from 2 December.
Funds operating under France’s Investissement Socialement Responsible (ISR) label will no longer be able to invest in businesses in new hydro carbon exploration, exploitation and refining products, or those exploiting coal and unconventional hydrocarbons from 1 January 2025.
To be determined:
EU legislation on the regulation of ESG rating providers (mid-24 tbc)
EU is likely to report back on current consultations on SFDR and the EU taxonomy both completed in December 2023.
UK Regulatory regime for ESG rating providers (tbc)
SBTi publication of Chemicals industry sector guidance (H2-tbc)
CEN NEWS
CEN-ESG has continued to strengthen its team, attended COP28 and recently updated its website.
Roger Johnston joined us a Director in October 2023, with over 20 years’ experience operating in financial markets including stints at Citigroup, BAE Systems, Numis Securities and Edison. Most recently he was the partner for Strategic Markets at executive search firm Holmes Noble.
Daniel Greer (Senior Associate) joined us in October from KPMG New Zealand where he was an ESG adviser, specialising in non-financial reporting and providing assurance over non-financial information. Daniel graduated from the University of Auckland with a Masters in Bioscience Enterprise and a Bachelor of Science in Physiology.
Tarun Gupta joined the team in November as an Associate. Upon graduating from the University of Bath with a degree in International Development and Economics, subsequently he worked for the Business Development team at International Development Consultancy Itad.
Congratulations are due on the following promotions: Lewis Sternberg to Associate Director and Ben von Kauffman, Dan Verity and Tesni Jones who are all now Senior Associates.
Maana Ruia and Ollie Tait represented CEN-ESG at COP 28 and the Climate Action Innovation Zone in Dubai.
Commentary on specific talks and presentations as well as key takeaways are available on CEN-ESG’s LinkedIn page (https://uk.linkedin.com/company/cen-esg).
We updated our corporate structure in December. CEN-ESG is now part of CEN Group Holdings, a fast-growing consultancy with financial focus with three underlying businesses: CEN Advisory, an Investor Relations and Board Advisory firm supporting companies to navigate financial markets; CEN-ESG, a sustainability consultancy helping businesses maximise their ESG potential, performance and disclosures; and, CEN Data, ESG data and research solutions for investors, enhancing understanding of investments as well as managing material ESG-related risks and opportunities. More details can be found at https://www.cengroupholdings.com .
Appendix
Summary of TNFD’s 14 disclosures
These disclosures come under four common pillars:
Governance
(1) Describe Board’s oversight of nature-related issues***
(2) Describe Management’s role in assessing and managing nature-related issues
(3) Describe Human Rights policies and engagement activities with respect to Indigenous Peoples, Local Communities and other stakeholders together with organisation’s assessment and response to nature-related issues.
Strategy
(4) Describe nature-related dependencies over the short-, medium- and long-term
(5) Describe the effect of above on the business model, value chain, strategy and finance as well as any Transition Plan
(6) Describe resilience to above under different scenarios
(7) Describe location of assets and/or activities (including value chain where possible) that meet the criteria for priority locations.
Risk & Impact Management
(8) Describe processes for identifying, assessing and prioritising nature-related issues in direct operations
(9) As per (8) but in value chain
(10) Describe processes for managing nature-related issues
(11) Describe how (8) and (10) are integrated into the Risk Management Process
Metrics and Targets
(12) Describe metrics used to assess and manage nature-related risks in line with strategy and risk management
(13) Describe metrics to assess and manage dependencies and impact on nature
(14) Describe targets and goals used to manage nature-related issues and performance against these.
***Nature-related dependencies, impacts, risks and opportunities.
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