TNFD and the Evolution of ESG Reporting - SustainOpp

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Taskforce on Nature-related Financial Disclosures (TNFD) and the Evolution of ESG Reporting

Inspired by the Taskforce on Climate-related Financial Disclosures (TCFD), in September 2023, the TNFD published its final framework, marking a significant step in forward in nature-related corporate reporting. Nature is no longer a corporate social responsibility issue, but a core and strategic risk management issue alongside climate change - thus, TNFD will be a vital framework in efficiently allocating capital to nature-positive investing and business activities, across operations and value chains.

Overview of TNFD

The TNFD disclosures are designed to be interoperable with the International Sustainability Standards Board (ISSB) S1 and S2 standards and are structured around the four pillars of the TCFD: governance; strategy; risk and impact management; and metrics and targets.

The TNFD framework was designed to align with the TCFD recommendations in terms of language, structure, and methodology. This alignment facilitates the merger of nature-related and climate-related reporting, leveraging the market's experience with climate reporting thus far.

Although the TNFD's suggested disclosures mainly describe processes, many organisations will likely need to source fresh nature-related data throughout their business operations and value chains to fully align with the TNFD’s requirements.

Figure: TNFD's recommended disclosures

Disclosure Requirements

The finalised framework presents several significant changes in comparison to the draft. Notably, it revisits six overarching requirements that span across the four pillars of the suggested disclosures, addressing:

Scope: This asks reporting entities to describe the scope of nature-related assessments and reporting, and the processes underpinning the scoping approach.
Time Horizons: consideration of short, medium and long term horizons of nature-related issues
Disaggregation: Nature-related information (impacts and dependencies) must be disaggregated to pin-point location, regional and asset-specific nuances with contextual information and actions taken or planned as a result.
Materiality: The TNFD framework recognises the potential for fragmented approaches to materiality assessments. Reporting entities are advised to adhere to their jurisdiction's regulatory guidance on materiality. If no specific jurisdictional regulatory guidance is available, the TNFD recommends organisations use the ISSB's criteria for pinpointing material information as a foundation for general purpose financial reporting. Additionally, entities may apply an impact materiality definition in line with the Global Reporting Initiative ("GRI").
Interaction with climate-related information: Disclosure of the convergence and interconnectedness of climate and nature-related impacts, risks and opportunities, given the interconnected nature of such physical and transition risks and factors.
Indigenous Peoples and Local Communities: A description and evaluation of a company’s human rights and engagement approaches and policies, in the identification, assessment and response to nature-related dependencies, impacts, risks and opportunities.

Figure: Alignment with global goals and the global reporting baseline

The TNFD Recommendations have been endorsed by several global standards bodies, including the UN Principles for Responsible Investing (PRI), Financial Stability Board (FSB), and International Organisation of Securities Commissions (IOSCO). The framework's alignment with other reporting standards may bolster the market's adoption of these recommendations and foster a harmonisation of nature-related disclosure standards. The ISSB intends to factor in the TNFD framework for future sustainability-related disclosures, and the prominent environmental reporting platform, CDP, plans to align with the TNFD framework. Moreover, the TNFD Recommendations aim for consistency with the European Sustainability Reporting Standards and the GRI's prevalent voluntary standards. Consequently, organisations can use existing sustainability reports as a foundation for their nature-focused disclosures. Several firms have expressed their intention to produce TNFD-aligned reports.

Drawing parallels with the TCFD's journey, the TNFD Recommendations could shape investor expectations and potentially regulatory standards. Furthermore, the TNFD framework is envisioned to be instrumental in achieving the Kunming-Montreal Global Biodiversity Framework's (GBF) Target 15. This target urges governments to ensure that large corporations and financial institutions consistently disclose biodiversity-related data. The alignment of the TNFD with GBF's goals could, in the face of evolving market dynamics and investor scrutiny, pave the way for the TNFD Recommendations' inclusion in compliance and regulatory reporting frameworks.

Nature-focused disclosures, whether mandatory or optional, can unlock nature-related investment pathways. Some market surveys suggest that institutional investors are starting to view nature as a unique asset class. Reflecting this sentiment, several investment managers have introduced natural capital strategies, observing significant capital inflows.

As regulatory and market scenarios evolve, the TNFD is committed to refining its guidelines. Their upcoming priorities encompass sector-specific advice, more nature-focused metrics, enhancing data quality and tools, and greater alignment with global initiatives. Even though nature-related disclosures are still emerging, the TNFD Recommendations stand as a pivotal step towards standardising sustainability reporting. It's yet to be determined if they'll follow the TCFD's model of gradual adoption.

SustainOpp presents an all-encompassing nature-reporting solution tailored to the intricate requirements of TNFD. By optimising data sourcing and ensuring upcoming compliance obligations, we endeavour to steer entities towards transparent, investor-grade reporting, aiding them in championing their sustainability vision.

Figure: Where the TNFD fits in the reporting architecture

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